Feasibility Report on Establishing Microfinance in Port Moresby

FINAL REPORT
Feasibility of Establishing a Microfinance Programme in Port Moresby, Papua New Guinea
This is a feasibility study prepared for the ADB-PNG Microfinance Project and AusAID, Port Moresby, PNG
By Carlos P. Ani, International Microfinance Consultant and Nancy Ebbes, Domestic Consultant
October 2003 Port Moresby, Papua New Guinea
Feasibility of Establishing a Microfinance Programme in Port Moresby, PNG Page 2
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Feasibility of Establishing a Microfinance Programme in Port Moresby, Papua New Guinea
Organization of this report

This feasibility study report is divided into 16 chapters, as follows: Chapter 1 is an analysis of the microfinance market in Port Moresby; Chapter 2 discusses about the main business strategies that is appropriate to and recommended for, GBDF; Chapter 3 discusses about the proposed microfinance methodology and implementation approach to be used; Chapter 4 discusses about the recommended target groups; Chapter 5 discusses about the financial products to be offered; Chapter 6 discusses about the recommended pricing policies and rationale behind; Chapter 7 discusses about the organizational arrangements, governance, legal registration issues; Chapter 8 discusses about the infrastructure for service delivery; Chapter 9 contains financial projections and a computation of total financial investment needed over a five year period; Chapter 10 discusses about risk-management strategies, to control various risks; Chapter 11 discusses about management information system and financial management system; Chapter 12 discusses about sustainability and sensitivity analyses to examine impact of various risk factors; Chapter 13 discusses about the human resource management aspects; Chapter 14 discusses about social intermediation activities and the provision of nonfinancial services Chapter 15 discusses about the technical assistance needed to start off and implement the proposed microfinance programme for the first three years of project implementation. Chapter 16 describes the recommended monitoring and evaluation mechanisms.
Below is a detailed table of contents.
Table of contents
LIST OF TABLES ............................................................................................................................. ....................3 EXECUTIVE SUMMARY ...................................................................................................................................6 INTRODUCTION ............................................................................................................................. ....................9 CHAPTER 1 MARKET ANALYSIS ..............................................................................................................10 CHAPTER 2 MAIN BUSINESS STRATEGIES ........................................................................................... .15 CHAPTER 3 TARGET GROUPS.................................................................................................................. .20
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----------------------------------------------CHAPTER 4 METHODOLOGY ....................................................................................................................25 CHAPTER 5 FINANCIAL PRODUCTS.........................................................................................................36 CHAPTER 6 PRICING POLICIES .................................................................................................................46 CHAPTER 7 ORGANIZATIONAL ASPECTS............................................................................................. .52 CHAPTER 8 INFRASTRUCTURE ................................................................................................................67 CHAPTER 9 FINANCIAL PROJECTIONS .................................................................................................72 CHAPTER 10 RISK MANAGEMENT ..........................................................................................................83 CHAPTER 11 MANAGEMENT INFORMATION SYSTEM .....................................................................93 CHAPTER 12 SUSTAINABILITY AND SENSITIVITY ANALYSIS ........................................................98 CHAPTER 13 HUMAN RESOURCE MANAGEMENT ...........................................................................102 CHAPTER 14 SOCIAL INTERMEDIATION ............................................................................................109 CHAPTER 15 TECHNICAL ASSISTANCE REQUIRED........................................................................ .113 CHAPTER 16 MONITORING AND EVALUATION ................................................................................116 ANNEX A MARKET SURVEY IN PORT MORESBY............................................................................. .121 ANNEX B LESSONS FROM PAST EXPERIENCES ................................................................................141 ANNEX C RESEARCH METHODOLOGIES USED ................................................................................146 ANNEX D INDICATIVE TOR FOR THE MICROFINANCE ADVISER...............................................149 ANNEX E SURVEY QUESTIONNAIRE FORM .......................................................................................150 ANNEX F TERMS OF REFERENCE FOR THIS ASSIGNMENT ..........................................................154 ANNEX G BASIC EQUIPMENT NEEDED ................................................................................................157 ANNEX H SUGGESTIONS ON TRAINING ..............................................................................................160
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ADB AusAID BM BPNG BSP CDC FO FM FSS GBDF IGA LFI MCC ME MFI MMR NGO OSS PAMP PAR PNG PNGBC POM RFF SG SGM SLS
Asian Development Bank Australian Agency for International Development Branch Manager Bank of Papua New Guinea (the central bank) Bank of South Pacific Community Development Center Field Officer Foundation Manager Financial Self-Sufficiency Ginigoada Bisnis Development Foundation income-generating activity Licensed Financial Institution Microfinance Competence Center micro-enterprises microfinance institutions Monthly Management Report non-government organization Operational Self-Sufficiency PNG-ADB Microfinance Project Portfolio at Risk Papua New Guinea Papua New Guinea Banking Corporation Port Moresby Revolving Finance Facility savings groups savings group model savings and loan society
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We conducted a study to analyze the microfinance market in Port Moresby. We found out that there is a very strong demand for savings services. More than half of people surveyed are saving up money to meet their basic survival needs. People save for a number of common reasons: to meet school fees, to save for the rainy day, to cover basic usual household needs, to finance or improve a small business, etc. Around 45% of people do not save money because there are no opportunities to save. There are no banks, credit unions, formal or informal savings schemes operating in low-income communities in NCD. People said they can save small amounts of money each week if there is a simple and convenient way or scheme of depositing those small savings in a safe place. Seventy percent of people say they can save 100 kina or less each week. There is also demand for credit, but not as strong as that for savings services. Common reasons for borrowing money includes: meeting usual household needs, paying for school fees, and financing small business. Loan sizes required by households are generally small, and loan terms short. Offering big loans is simply inappropriate for majority of the poor. We found out that people generally borrow four times a year. The common source of credit is relatives and wantoks and the local moneylender. The latter charge very high interest rates (as high as 1,200% per annum); exploiting many people in the villages. This suggests that offering a simple service, like savings, can create large benefits for poor and vulnerable households. Borrowings from wantoks, relatives and family members are very common in all the settlements and villages surveyed. This kind of borrowing is not a true loan in the sense that the wantok loans are not really repaid, in a specific time-bound manner, and with interest. Key informants have revealed that the wantok borrowing, as described above, is the primary cause why many past credit programmes in PNG have failed. The wantok borrowing has bred a poor and wrong understanding of modern financial concepts, and is behind the poor credit culture in the country. The people generally consider loans from microfinance institutions as free money similar to wantok loans. We believe that this is the main challenge facing the microfinance sector in PNG. We made some quantitative estimates on supply and demand (refer to Annex A for details). Our computation shows that the demand is large enough to justify the establishment of a microfinance programme in NCD. We also reviewed all of the available literature to extract key lessons behind the failures and successes of past microfinance experiences. These will be needed in designing an appropriate microfinance programme for Ginigoada that considers the mistakes of the past as well as those things found successful. After analyzing the specific conditions (opportunities, strengths, needs, risks, threats) in Port Moresby, we recommended a set of 9 main business strategies; see Table 2 for details. We recommend that Ginigoada adopt a savings group model as its main methodology for delivering financial services to low-income people. A savings group is a small group of men Page 6
----------------------------------------------or women who have mutually agreed to save money on a regular basis. The important thing is that they a common bond, and they trust each other. Specifically, the methodology should have the following features: (a) a strong savings-based approach, with a savings now, borrow later principle; (b) use of simple savings products that are accessible and open to large sections of the population; (c) use of small groups as tools to select clients, to facilitate collection of savings and loan installments, and to serve as venue for social intermediation activities; (d) use f simple loan procedure that minimize risks and increases staff productivity, and the use of other proven techniques and mechanisms to control delinquency. Based on feedback from various village leaders, potential clients, community leaders, church leaders, and key informants, it seems that this savings group approach is the most appropriate method, with the best chance of success. During the first 2 years, we recommend that Ginigoada targets low-income women and men from 25 villages and communities in NCD, women belonging to established church groups and economically active people. We recommend that Ginigoada also form church-based savings groups, working through church leaders and pastors. Church women can be excellent savings groups because of the unity and solidarity that they have built up over the years. We recommend that the Ginigoada focus services on low-income people living in the following 25 communities / settlements in the three electorates of NCD. It seems that 80% of all poor and low-income people in NCD are living in these 25 villages / settlements. We recommend that Ginigoada offer four kinds of savings accounts, namely: a) Budget savings account, b) Capital-Build-Up Savings account, c) School Fee savings account, and d) Investment savings account. There shall be only two kinds of loans: a) Regular Loan and b) Enterprise Loan, which is also called as small business loan. We examined the various options regarding the organizational aspects of this proposed microfinance programme. The three options were: (a) operate under an NGO setup but with agency banking arrangement with a licensed local bank; (b) operate under a Savings and Loan Society setup; (c) operate under a Licensed Financial Institution setup. After analyzing the pros and cons, we came to the conclusion that the SLS provides the best fit and optimum solution. The SLS option provides the best set of advantages, and disadvantages are minimal which can all be counter-acted. We see four main actors in this programme, namely: GBDF, AusAID, the PNG-ADB Microfinance Project (PAMP) and the Ginigoada Savings and Loan Society (GSLS). There is a need to have a clear and definite web of formal relationships among the four, where their respective roles are clarified. GSLS Board of Directors (BOD) shall be formed carefully, because it will be the main body which will govern GSLS and will provide steady direction for the microfinance organization. The board should consist of dedicated people. The BOD should start by developing a Business Plan and a philosophy that will be the operational guide on how the organization will attain its vision. Given the complexity of the programme, and the lack of technical skills and experience within the country, we recommend that an expatriate Microfinance Technical Adviser be hired to help establish the microfinance organization, set up all systems, train the managers and staff and lead the way in attaining viability and scale. Page 7
----------------------------------------------We recommend a basic service delivery infrastructure of two branch offices; the two will not be established at the same time. GSLS will first establish the first branch and the second branch established after six months, to give time to refine the methodology, policies and tools. We prepared a financial model to project future performance of GSLS and to generate cash flows, balance sheets and income statements. Based on this model, we see GSLS becoming viable by the end of 3rd year (around 11th quarter). The total financial requirements will be K5,977,224 or 1,561,410 Australian dollars, more or less, which already includes the technical assistance costs and the baseline / impact evaluation costs. The programme is expected to serve 8,300 poor / low-income people in NCD. There are three major risks facing the programme a) loan delinquency, b) fraud and funds misuse and c) theft and robbery. This report provides solid and concrete recommendations to mitigate these risks. We ran sensitivity analyses on our financial model. The returns on investments will have a very strong impact on GSLS because it will rely to a large extent on investment income. An investment return ranging from 15% to 16% will be just fine, but when it dips to 12%, then GSLS will not reach viability. By far, the amount of loan losses suffered each quarter will have the biggest and strongest impact on GSLS. A 4% or 3% quarterly loss is fatal and will surely mean failure of GSLS. A quarterly loan loss of 9% is fatal and will crash the programme in 3 years time. A quarterly loan loss of 4% is tolerable but with large impacts on profitability; viability will be pushed back by many quarters. Therefore, it is imperative that loan default should be carefully managed, monitored and controlled. Loan losses should be kept below 2% or 3% at all times. These sensitive analyses highlight the risks that the programme faces. Given the poor credit culture in PNG and given the extreme sensitivity of the programme to loan losses, the programme must take a very conservative approach to credit extension, aiming to protect itself against any undue exposure to credit risks; hence our recommendation to take strong multiple defenses against loan delinquency and defaults. GSLS must also invest the funds wisely so that it gets the best possible return on investment.
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Purpose of this feasibility study This feasibility study was commissioned by the PNG-ADB Microfinance Project, on behalf of Ginigoada Bisnis Development Foundation (GBDF) and AusAID-PNG to determine the feasibility of establishing a microfinance programme in the capital city of PNG, Port Moresby. We (the Consultants) were tasked with conducting a community survey to determine market demand and supply; provide recommendations on target clientele, financial services to be offered to them, the prices of such products, and the specific areas to be served during the initial time period of piloting. We were expected to provide advice on the saving and lending policies, the specific microfinance methodology that will be used in the field, including the detailed procedures on disbursing and repaying loans, and of collecting client savings; provide advice on the organizational and management structure of the MFI, including the legal registration and relationships with existing GBDFs structure; and provide recommendations that will ensure reasonable separation of financial services and nonfinancial services. We were expected to provide advice on the necessary institutional adjustments required to establish a viable and sustainable MFI; including advice on what business strategy GBDF should take or adopt. Financial projections were expected to be prepared, covering a period of five years, ensuring that all assumptions are made explicit; and yearly budgets prepared showing the external funding required for implementing the business strategy for a period of five years. Finally, we were tasked with analyzing the conditions necessary for attaining institutional and financial sustainability of the MFI given set of constraints and make the necessary recommendations to achieve these objectives. See Annex F for a complete copy of the Terms of Reference for this Mission. Research methodologies used We used a number of methods to collect information. Field interviews were held with more than 110 people /key informants. Field visits were made to various settlements in Port Moresby, to see the small businesses operated by low income people. Observations were made to see the current skills training being provided by Ginigoada. Focus group discussions (FGDs) were held to solicit direct first hand information from the community members, leaders, and potential clients. Finally, two surveys were conducted; (a) household survey consisting of interviews with 190 poor households randomly selected, and b) an informal survey of small informal businesses, consisting of 10 randomly selected small businesses in NCD. Please see Annex C for a complete description of the research methodologies that we used.
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This chapter describes Livelihood patterns of low-income people in Port Moresby Saving behavior of people Borrowing behavior Coping mechanisms Service providers operating in low-income communities Estimate of demand and supply
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Chapter 1 Market analysis

The key findings of the market study are summarized in this chapter. Please refer to Annex A if you want to see the detailed findings. Demand for savings services The study revealed that there is a strong demand for savings services. More than half of people surveyed are saving up money to meet their basic survival needs. They save for a number of common reasons: to meet school fees, to save for the rainy day, to cover basic usual household needs, to finance or improve a small business, etc. Around 45% of people do not save money because there are no opportunities to save. Three-fourths of all respondents (75%) said that there are no banks, credit unions, formal or informal savings schemes that are accessible to them and where they can safely put in their savings. The features they are looking for in savings products are: safety, accessibility (can be withdrawn anytime), ease of transaction. No one said that they want high interest on their savings. The survey revealed that people save some money to pay for the school fees, because many households are having difficulties in raising money every year to meet the school fees; hence they try to save up for it. People are saying that they can save small amounts of money each week if there is a simple and convenient way or scheme of depositing those small savings in a safe place. The great majority of people (70%) say they can afford to save money of about 100 kina or less each week. The average savings pay-in will be around 15 to 20 kina per week per person. This data suggests that, if a microfinance programme is started, the amounts of savings deposit expected from each household each week will be generally small, but such amounts can translate to millions of kina of aggregate deposits annually if Ginigoada is serving thousands of small savers. Demand for credit services There is also demand for credit, but not as strong as that for savings services. Credit demand is strong in some places, among certain ethnic groups; and lower in other groups / places. Common reasons for borrowing money includes: meeting usual household needs, paying for school fees, and financing small business. Loan sizes required by households are generally small, and loan terms short. The study revealed that 70% of people borrow money. The common source of credit is relatives and wantoks (41%), then followed by moneylender (24%). Only a few use finance companies (2%) and banks (5%), which are patronized by people who are formally employed and by better-off households.
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(Note: In the map above, the red-shaded portion is the Central Province, and the black dot near the middle of that province is the NCD.)
Majority of households (41%) borrow for immediate or near-immediate needs; to meet basic consumption and food needs. Realizing their vulnerability due to irregularity of their income streams, poor people are borrowing some money to ensure that they will have something to eat on days that they have no incomes. On the other hand, some people borrow money to improve their existing micro-businesses. We may conclude that people obtain a loan to meet both business and common household consumption needs. We also asked people if they need a loan for their business expansion; around 47% said they would need a business loan; and loan size ranges from 50 to 500 kina. The survey revealed the only kind of informal lenders in the various settlements and villages are the local sali moni, local moneylenders. There are many households that borrow from moneylenders to meet various common and emergency needs, in spite of the high interest rates (as high as 1,200% per annum). It was revealed that usage by wage earners of moneylenders services is high. Many of those wage earners are caught in vicious debt traps, where all their pay, each payday, goes to finance companies and moneylenders, and then they have to borrow again to survive for the next two weeks. These pull them into deeper debt and poverty. This suggests that offering a simple service, like savings can create large benefits for poor and vulnerable households, because in cases of emergencies, they need not anymore turn to moneylenders, but instead they can simply draw on their savings. The money that is supposed to be paid as interest to the moneylender is saved. The average amount of borrowing is rather small at 405 kina; around 41% of all borrowings are for amounts less than 200 kina. This suggests that the Ginigoada microfinance programme, if one is established, should offer loans of small sizes mainly. Most of the loans Page 12
----------------------------------------------should be for 500 kina and less. Offering big loans is simply inappropriate for majority of the poor. We found out that people generally borrow four times a year; nearly 30% of people borrow 1 to 5 times a year. This suggests a short repayment term for loans, probably as short as 2 or 3 months only. The survey also revealed that some ethnic groups tend to borrow more frequently than other ethnic groups. The survey revealed no formal or semi-formal institution that provides financial services in all settlements covered by the survey. There was no bank, credit union or even credit-providing NGO detected. Poor people are not using the financial services of banks in NCD because: (a) Poor people do not understand the complex rules or processes in accessing savings and loan services from banks; (b) Poor people have small amounts of savings to deposit, and they say it is not wise to spend money to save these small amounts; (c) Poor people are reluctant to save in or borrow from banks because they have no good business or IGAs, or a secured job or a secured source of income; (d) Many banks are unfriendly to the poor; people are afraid to approach banks or finance companies, which tend to lend only to people employed in the formal sector. Borrowings from wantoks, relatives and family members are very common (41%) in all the settlements and villages surveyed. But the amounts of those borrowings are small and repayment not expected or enforced. They are informal loans extended to members of the extended family or members of ones wantok, hence they are really gifts and hand-outs, and not really as loans as understood in modern economies. Key informants confirmed that this kind of borrowing is not a true loan in the sense that the wantok loans are not really repaid, in a specific time-bound manner, and with interest. Key informants have revealed that the wantok borrowing, as described above, is the primary cause why many past credit programmes in PNG have failed. The wantok borrowing has bred a poor and wrong understanding of modern financial concepts, and is behind the poor credit culture in the country. They have been used to the loans given by their relatives and wantoks; and people generally consider loans from microfinance institutions as free money similar to wantok loans. We believe that this is the main challenge facing the microfinance sector in PNG. Demand for insurance services A common practice found in all villages and settlements is that of helping households in emergency situations or who suffered a sudden death in the family. This wantok safety net was reported by 73% of respondents, saying they rely on their wantoks, relatives and clan members for financial help in cases of emergency. But there are cases reported when the very poor and the most vulnerable households are not able to meet their emergency needs, and key informants say that the wantok safety net is weakening among certain groups. We may conclude therefore that the demand for insurance is not yet clear at the moment, and it would need further study in the future. Quantitative estimates of demand We made some quantitative estimates on supply and demand (refer to Annex A for details). Our computation shows that potential demand for savings services will be 8.6 million kina, Page 13
----------------------------------------------while loan demand will be around 3 million kina.1 Based on our financial modeling, where a microfinance institution in NCD should have a client outreach of at least 4,000 people and a loan portfolio of at least 1.5 million kina to break even, we can therefore conclude that the demand is large enough to justify the establishment of a microfinance programme in NCD.
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This chapter describes Lessons learned from previous microfinance experiences Key factors to consider in formulating business strategies Recommended 9 business strategies for Ginigoada
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Chapter 2 Main business strategies

2.1 Lessons learned from previous microfinance experience
Before one can formulate appropriate business strategies, one has to examine the past, and draw lessons from the prior experiences in microfinance in PNG. Those will be useful in understanding the nature of the market, provide warning about the mistakes done in the past, and learn about the things that have worked well. We reviewed all of the available literature, and we extracted the key lessons behind the failures and successes of past microfinance experiences; below is a summary of key lessons learned.
Lessons Learned from Prior Microfinance Experiences

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We believe that in order to have the best chance of success, it is imperative that in designing a microfinance programme for Ginigoada all of the above key lessons, if possible, should be integrated or considered. The details of these key lessons are found in Annex B.
2.2 Factors to be considered in formulating business strategies

The formulation of appropriate business strategies for Ginigoada should necessarily consider a number of key factors or conditions, as follows: (a) the unmet needs of the target Page 16
----------------------------------------------population, which creates business opportunities for Ginigoada; (b) the strengths and weaknesses of existing providers of financial services; (c) the strengths and comparative advantages of Ginigoada; (d) opportunities and threats within the over-all operating environment in POM and PNG, and (e) lessons from past mistakes and pitfalls. Table 1 Specific conditions in Port Moresby - below shows some details of these conditions prevailing in NCD.
Table 1 Specific conditions in Port Moresby

Poor and low-income people have large unmet needs for savings and credit services Poor people are being victimized and exploited by moneylenders; Many low-income people are in a vicious debt traps The lack of jobs lead to idleness, sub-human living conditions and contributes to rise of criminality, especially theft and robbery; The wantok system helps in meeting household needs in case of emergencies but it is inadequate, in some cases, given the high costs of burial. The banks are not interested in serving low-income people There is a poor credit repayment culture prevailing and poor understanding of modern financial concepts Given the extent and magnitude of cash hoarding, mobilizing savings could lead to substantial capital formation and better use of financial resources; The current law and order situation in the city is serious, making it difficult, but not impossible, to do microfinance; Ginigoada has already gained credibility in the city, and has delivered some basic services to certain communities. Ginigoada has formed a high profile board and has successfully linked with various organizations and a donor; A social-welfare approach has prevailed in Ginigoadas thinking and activities; there is a risk that the microfinance programme will be hampered or become dysfunctional or unviable.
Costs of doing business are high in the POM which elevates the threshold levels to reach viability. It will take longer time period and higher prices to attain viability. There are some past experiences in microfinance in PNG from which valuable lessons can be drawn. Understanding by people on modern concepts on loans, savings and insurance is still poor.
There are no significant financial service providers at the grassroots / community level, hence no competition to Ginigoada. It is difficult to find high quality staff, especially those with integrity and good skills. The risks of fraud, misuse and low performance is high.
There are village courts and informal bodies that could help settle disputes and conflicts; There is interest in PNG government to support microfinance initiatives. There are laws that allow the creation of financial institutions that permits collection of small savings. But there are capitalization requirements and rules to contend with.
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---------------------------------------------- The population in POM is heterogeneous and there are distinct and contrasting differences in the behavior, needs and culture of the various ethnic groups. This makes microfinance more difficult. Churches and community bodies / leaders are interested in working with Ginigoada. Churches have strong networks and presence in the various communities. The PNG-ADB Microfinance Project (PAMP) is willing to extend technical assistance to Ginigoada. The donor (AusAID) is open to proposals to help poor and low income people in Moresby to improve their income levels and living conditions thru microfinance. The returns on T-bills are good, capital is safe and which can provide stable source of income for an MFI. The Bank of PNG has adopted a very strict rule on savings collection, forbidding collection by unauthorized parties. There is a perception that some members of the Ginigoada board will not be receptive to charging costcovering interest rates.
The best-fitting business strategies are those that capitalize on the strengths, take advantage of the available opportunities, mitigate the risks, improve on weak areas and counterbalance the threats.
2.3 Recommended 9 business strategies

Given the above set of conditions (opportunities, strengths, needs, risks, threats), we recommend a set of 9 main business strategies; see Table 2 - Recommended main business strategies. The third column of Table 2 below indicates where in this document the details of the strategy statement are located.
Table 2 - Recommended main business strategies

No.
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Strategy statement 6 . ; B 6 - . 1 = = = F . * B G . . = E . = . =
Details found in: See Chapter 4 Target Groups and Chapter 5 Financial products to be offered; see also section 8.4 social mapping
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See Chapter 3 Methodology and approach of implementation and section 10.1 Managing Loan Delinquency; see Chapter 12 MIS and Financial Systems See Chapter 7 Organizational Arrangements
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See Chapter 8 Organizational Arrangements, especially sections 7.5 and 7.6
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See Chapter 13 Human Resource management; see also Chapter 8 Infrastructure
See section 8.5 collaborating with existing networks and bodies;
See Section 10.3 Managing risks related to theft and robbery; See section 8.7 and Chapter 15 Technical Assistance Required ; see also Section 10.6 financial requirements; see section 14.4 working with Ginigoada NGO and with other NGOs See section Chapter 14 Social Intermediation
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This chapter describes Target groups to be served Client selection criteria Reaching the poorest households in NCD Target communities in NCD
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Chapter 3 Target groups

3.1 Target groups to be served during first three years
During the first 3 years, we recommend that Ginigoada targets these people:
Table 3 - Target groups

1 Low-income women and men :: 5 . . = - . . B9& 5 & 1 = - = - : >- . - * : ; - = : - : . : : . . - : = = = : = . = :-
Women belonging to established church groups - : - . - - : . Economically active people :: ; ; : : ; ; . . = = := =. . - -
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Beginning in the third year, the programme may serve a new market segment the population of school-age children, age 10 to 18, who will be served under the proposed school children savings scheme; details of this component is not described in this feasibility study. 3 Church-based savings groups: Working through church leaders and pastors, Ginigoada can reach out to established womens fellowships in the various churches in NCD. They can be excellent savings groups because of the unity and solidarity that they have built up over the years. The savings group operating within churches shall operate following essentially the same methodology used in the villages except that there will be a stronger and bigger
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----------------------------------------------role for Facilitators and group officers. They shall be expected to have higher initial group size numbers; for example, instead of a minimum of 7, church groups should have 12 or 15 as the minimum number of members. The church-based savings groups, which are considered close-type savings groups, can meet on their own banking day even without the FO present. The chairperson presides in meetings. The money and transactions are simply turned over to the FO by the officers and Facilitators. We talked with leaders of several churches (United, Catholic, Baptist and SDA) and they confirmed their willingness to collaborate with Ginigoada in terms of helping set up a microfinance programme in their respective churches and communities. They also confirmed that there are womens groups in their churches and these groups would probably be interested in forming savings groups. 4 Some churchwomen said the women in the churches will support the idea if the pastors and key top church leaders support the idea of savings groups.5 The senior church leaders of the United Church and SDA spoke not only of their own respective congregations but of the larger number of churches in NCD that belong to United and SDA. These two church groups alone comprise 50% already of the total population of NCD. We wanted to speak to more churches but it was not possible due to time limitations.
Box 2 Religions of people in NCD

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Source: PNG 2000 census
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3.2 Client selection criteria

It is important to formulate specific guidelines and criteria in selecting member-clients to maintain focus on the target clientele. The suggested minimum eligibility requirements are: . . C - -= . 5 = - : )/ = : = C = 5 -
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A person may or may not be engaged in an IGA at the time of joining. But there must be an expressed desire to eventually engage in some IGA in the future. There are a few additional eligibility requirements for clients who will access the Enterprise Loans (see section about Credit Products). While there is a scope to include better-off clients and lower middle-class people to the savings programme by setting the threshold high enough to cover some of the lower middle class households, the programme would NOT have a special dominant focus on attracting better-off clients. The methodology, as described in this report, talks about working in poor settlement areas and serving the poor and low-income households; hence the strong poverty focus of the programme. The savings component of this programme should have a wide spectrum or wide base covering the poorest, the poor, the laboring poor, the salaried poor, the lower middle class, and the vulnerable non-poor households almost everyone in the village. Only the rich and upper middle class would probably not be served by this programme. Having a wide, diversified and stable savings base is always good for an MFI.
3.3 How about the poorest households?

In any village or settlement, there are very poor households. The question is should Ginigoada reach out to them. Having negative networths, it is usually not a good idea to serve them with credit. The poorest households, themselves, do not like to borrow money because they have no existing businesses or a steady source of income. They are reluctant to get loans because they are unsure how they can meet the fixed weekly installments. But the poorest can usually benefit from a savings programme that allows them to freely save any amount and withdraw as per need. If a savings group accepts them into their group with a clear understanding that they are there mainly to participate in the savings component, then it is alright to allow them to participate because they can benefit immensely from the programme. They can save in the Budget savings account where there is no required minimum amount to save. One can put in even 1 kina per week or even nothing in a given week. Given such an opportunity, even very poor households can save money to smoothen their consumption that is they save up money for future days when there are no incomes. Also, over time, they can build up some amount of money, get out of a negative networth situation and even start participating in the credit component. Serving the poorest segments of the population will deepen the reach of Ginigoada and is good for the overall economy as it brings the marginalized people to the ambit of the formal financial system.
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Page 23
-----------------------------------------------
3.4 Target areas

We recommend that the Ginigoada microfinance programme focus services on low-income people living in the following 25 communities / settlements:
Table 4 - Target areas in NCD

Kira-kira Pari Vabukori Hanuabada Baruni Tatana Korobosea Segani Morata 8 Mile June valley Gerehu 9 Mile 6 Mile 5 Mile Erima 2 Mile Tete Gorobe Talai Taikone Sabama Kaugere Vadavada Horse camp
It seems that 80% of all poor and low-income people in NCD are living in these 25 villages / settlements. There may be other smaller pockets or small communities that we missed, but those can be identified later on through the comprehensive social mapping.
Page 24
-----------------------------------------------
$
This chapter describes
Recommended microfinance methodology: savings groups Approach in forming and maintaining savings groups Rationale behind the savings groups method Will this method work in NCD Catering to individual savers: individual saver component Membership signup campaigns
Page 25
-----------------------------------------------
Chapter 4 Methodology
By microfinance methodology we mean the set of rules, policies, procedures, mechanisms, personnel, and structures that enable the delivery of financial services to the ultimate beneficiaries the clients. It is difficult to design an appropriate methodology for Moresby given that no methodology has ever been seriously tried and tested in a large urban area like Moresby where there are hundreds of ethnic groups of people, of varying cultures, language and work ethics.
4.1 Recommended microfinance methodology

After carefully weighing and analyzing the results of the microfinance survey, interviews, the various sociological analyses (done Papua New Guinean sociologists), and the past experiences in microfinance in PNG, it became clear that the microfinance methodology for Ginigoada should have the following features: A strong savings-based approach, with a savings now, borrow later principle; 7 Use of simple savings products that are accessible and open to large sections of the population; Use of aggressive membership signup campaigns to encourage wide participation in the communities in the savings scheme of the programme; Use of savings groups in villages and settlements as primary tool to select clients, to facilitate collection of savings and loan installments, and to serve as venue for social intermediation activities. Use of simple, accessible savings accounts for people who can not attend the weekly meetings of savings groups (like wage earners or those working in markets or those engaged in trading activities in places outside of the settlements); Use of simple loan procedure that minimize risks and increases staff productivity, and the use of other proven techniques and mechanisms to control delinquency.
As the primary methodology to reach large numbers of low-income people in an efficient manner, we recommend that Ginigoada adopt a savings group model as the basic core methodology under this proposed programme. Box 1 below gives a definition and description of a savings group.
Box 1 - What is a savings group?

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Page 26
----------------------------------------------7 =: 9 ; :: - : . . - 9 : 8 6 : : . * = = & . : : = 6 !/ C # :6 = = ; -
We dont recommend mixed-gender groups because of two main reasons: (a) in a mixed group, the men will likely dominate the leadership and the talking; women will likely be quiet, passive and not actively participating; this is due to the traditional behavior of men and women in PNG society; and (b) to avoid jealousy among husbands of females who are participating in a mix-gender group.8 It is better to have exclusively female groups and exclusively male groups. We recommend that Ginigoada give higher preference to women groups because women are more reliable, dependable and trustworthy than men.9 They tend to stick together longer than mens groups. But it is also important to open the options to men to form their own savings groups, because in most PNG households, it is the men who control the finances / money of the household; they tend to make all of the money decisions.10 Also, there is a section of the male population that would be responsible enough to make savings groups work. To implement the formation and maintenance of savings groups, we recommend an approach called Savings Groups Approach (SGA), which is explained in detail below. There are two kinds of savings groups, the open-type community-based and the churchbased type. Section 4.2 below describes the open-type savings groups.
4.2 - Approach in forming and maintaining savings groups

The savings groups approach (SGA), in a nutshell, has seven key operational principles, as follows: 1) Financial services shall be delivered to the settlements or villages to make them accessible to common people; almost all banking transactions are done in the village; 2) The use of respected people in the community, called here as point persons, allows the identification of reliable and dependable people in the community as members of savings groups,
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Page 27
----------------------------------------------3) Self selection and self-formation of groups is an effective mechanism to identify good clients in the community, and to screen out the ones who are not yet ready for savings and credit services. 4) Savings will be the primary purpose for groups, and credit is secondary only and is optional. Members may opt to save only and opt not borrow at all. Fees will be charged to help cover costs of delivering savings services. 5) The groups will be encouraged, not forced, to include the poorest households in their groups, so they can participate in the savings component; 6) Every loan should be based on savings and should be approved and guaranteed by the savings group. This mechanism ensures that loans go to deserving clients, those with real need, with good character and with ability to repay. 7) Use of local symbol of authority to enforce collection on willful defaulters. SGA will have four phases, as follows: a) pre-formation of groups, b) formation of groups, c) group maintenance and d) group multiplication. Pre-formation of groups $ - - = - 9 - : ; "9( G :- . =- : ; = - 6 7 ( : : ; = 6 C G - F - ' F = ( G 7'(8 . F G : ;= '( - '( ; . - '( 6 : F . G . B = . ; : . = * 6 ; :F - * = : E : = * . &F = G . C &F :- ; : G - = 8
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Page 29
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The savings group model, as presented here, is a hybrid methodology that combines the best features of village banking (common in Africa), the Self-Help Group approach (which is common and predominant in India), the SLS found in several provinces of PNG, Safesave model pioneered in Bangladesh; the CRS village banking models found in Indonesia, some elements from Philippine-style Grameen approaches, and some elements from savings groups models found in the Philippines.
4.3 Rationale behind the savings group approach

Below is a briefly discussion of the principles, logic and rationale behind this approach. (a) The savings groups should have a common bond, which can be based on ethnicity, church affiliation, language, prolonged contact, or common trade. Forming groups according to ethnic origins will be encouraged but not strictly required. Dr David Kavanamur15, a well-known professor in University of Papua New Guinea remarked that in a country such as PNG, the existence of 800 different cultures means that the microfinance method adopted should be flexible enough to suit each locality.16 He emphasized the need to consider culture when designing a microfinance programme. Ginigoada should become aware of the cultural differences that exist among the many peoples groups within Port Moresby, and the microfinance market study (Annex A) provides an initial objective analysis of some cultural aspects involved. The population of Moresby is heterogeneous. There are many peoples groups or wantoks. Having an ethnic-blind microfinance programme may lead to poor results because the existing divisions between peoples groups may prevent the savings groups from working properly.17
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Page 32
-----------------------------------------------
One of the secrets of the more successful microfinance programmes in PNG is that they serve a homogeneous clientele. For example, the East New Britain Savings and Loan Society (ENBSLS) serves one people group, the Tolais, who values hard work, entrepreneurial abilities, and building up savings. The Tolais want to save up for their future, and to improve their living conditions. Savings mobilization among the Tolais is highly successful as proven by the impressive record of savings mobilization among them by ENBSLS.18 Another example is the successful microfinance programmes / savings and loan societies in Manus and New Ireland which serve heterogeneous clientele also. These MFIs are also successful in mobilizing savings and disbursing loans. Even people in BPNG recognize this factor (of serving a homogeneous clientele) as an important ingredient behind the success of those savings and loan societies. (b) Savings will be the primary emphasis, and credit is extended subsequently based on savings, character and verified need; Based on all literature reviewed and from information provided by informants, credit repayment culture is still poor in PNG. One of the reasons for the collapse of prior microfinance experiments was poor repayment of loans. The main lesson that can be learned from the (LLD) Liklik Dinau experiment was that people were not ready for something which is strongly credit-driven. The LLD copied exactly the Grameen model, without realizing that the clients here are not yet ready to handle credit. Also, there is a strong handout mentality prevailing and any money received by a person is considered generally as a dole-out or free money. People have not yet fully understood the concept of a loan; that it should be repaid back, with interest, and in an orderly, regular and time-bound manner. Also, a credit-driven programme contains no real penalties attached to defaulting. The savings group concept counteracts the handout mentality because people have to make sacrifices to build up their savings balances over time. They know that they are borrowing their own money. If they default on their loans, then they lose their savings, which is a real painful penalty.19 Ginigoada can use the time period when people are saving up money, which can be as long as 3 to 12 months, to educate them about basic financial concepts and about the importance of financial discipline. Loans are extended if there is a verified need, where the FO and the group members themselves shall make the verification. Finally, it has been proven, in many parts of the world, and even in PNG, that people tend to be extra careful in managing their own savings money. See one example above on Elevala savings group. A key informant remarked: In some places within NCD, disbursing loan will be a problem because there will be few takers; people do not have IGAs or businesses, and there is lack of
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Page 33
----------------------------------------------economic opportunities, or if there are, people do not see them or do not have the abilities to exploit those opportunities. People do not need or want loans in those places.
(c) Financial services shall be delivered to the settlements or villages to make them accessible to common people; The savings group becomes the venue for banking in the community. Members can come to do banking putting in savings, making withdrawals, applying for a loan, paying for a loan, opening new or additional savings accounts, closing some old accounts, applying for an ID card, etc. They can also put in their savings on a daily basis, saving away small household money that could be easily borrowed by a wantok or a relative. Except for large withdrawals and release of loans20, most of the common banking transactions are done at the village level during the weekly banking day of the group. This makes financial services truly accessible to grassroots people. (d) Use of local symbols of authority to enforce collections on willful defaulters; Many informants confirmed that Village Courts and the informal mediation committees are useful in enforcing discipline or settling conflicts. In one village that we visited (8 mile), people said that their Village Court is functional and settles disputes effectively. Nobody has so far gone to jail because people there tend to settle up, patch up and pay up loans once the case is heard or settled by the Village Court. Being tried by Village Court is also shameful to a family hence the whole clan or family come to the rescue of a person faced with a case; not wanting him to go to jail.
4.4 Will it work?

When we talked with potential clients, community leaders, church leaders, key informants, etc. we described to them the above methodology including the savings and loan products, and asked their opinion on whether it will work in their village or not. We received positive feedback from all of them. One thing they mentioned is that the scheme must be carefully and patiently explained to the women and men in the communities so that there wont be any false or wrong expectation. The common suggestion was that Ginigoada should hold public awareness campaigns within the villages / communities before the scheme is actually started in those villages.
4.5 Individual saver component

Not all interested and qualified people in the village can participate in weekly meetings of savings groups. These are people like wage earners or those working in markets or those engaged in trading activities in places outside of the settlements. For them, Ginigoada shall offer services in a different manner, dealing with them on individual basis. They shall be offered simple, accessible savings accounts, which they can operate as individuals; but all
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Page 34
----------------------------------------------transactions are done at the Branch Office; meaning they have to come to the Branch Office to personally make deposits, withdrawals, etc. Individuals can also get individual loans, subject to certain maximum amounts, and provided further that the loan size should not be higher than 85% of their balance in the CBU savings account.21 There shall no need for any guarantee on the loan, because the loan is fully secured by the savers CBU account. Loans are processed speedily, and released within 2 days of application. (Loan processing procedure is simple, hence the quick turn around). Members get their loans quickly. Individual savers and borrowers shall be served also through payroll deductions schemes, where their savings deposits and loan installments are deducted automatically from their fortnightly wages. We recommend that the Ginigoada microfinance organization install these payroll deduction schemes on the second year of programme implementation.22
4.6 Membership signup campaigns

We recommend that Ginigoada implements aggressive membership signup campaigns to encourage wide participation in the savings scheme, and also to attract and encourage individual savers to open individual savings accounts. This is part of the strategy to widen participation of low income people in NCD; and to attain a large or substantial savings portfolio, in the shortest possible time. GSLS shall conduct public awareness campaigns, frequently, in all the 25 settlements (target areas) during the first 3 years of operations. It will include activities like; hold small group meetings in settlements, mass media (radio ads) to invite members, distributes pamphlets widely, working with churches, NCDC and local magistrates in publicly conducting awareness meetings in villages, etc. A Public Address System (PAS) (a set of 3-4 microphones, 1 amplifier and 2 loudspeakers), large placards and colorful streamers shall be used in such public meetings. This tactic is done by many SLS in the provinces, with very good results. One effective way to reach the wage earners is to establish payroll deduction schemes so that making deposits and paying loan installments can be easily done every forthnight.23
21
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Page 35
-----------------------------------------------
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This chapter describes Savings products to be offered Features that make savings products attractive Loan products to be offered Loan verification and appraisal Target communities in NCD Managing caseloads of Field Officers Designing new financial products in the future Flexibility in mixing products at the branch office level
Page 36
-----------------------------------------------
Chapter 5 Financial products to be offered

5.1 Savings services to be offered
We recommend that Ginigoada offer four kinds of savings accounts, namely: a) Budget savings account, b) Capital-Build-Up Savings account, c) School Fee savings account, and d) Investment savings account.24 The features of each of these four are described below Budget savings account is a mandatory for all members. This is a demand deposit account, where one can deposit any amount at any time, and withdraw any amount at any time. This is called budget because people can use this account to manage their fortnightly household budget. See features below:
Account opening fee = 1 kina per passbook 25 W ithdrawal fee= 1 kina per withdrawal Earns interest at = 4% per annum Fee for replacing a lost Budget savings passbook= 3 kina No minimum balance required
Capital-Build-Up savings account (CBU) is optional for members to open. This is only for those who like to take up a loan later on, because the loan balance is based on this CBU account. Any amount of deposit may be made. If there is an outstanding loan, the CBU account is frozen; a lien is placed on it and no withdrawals are allowed until the loan is paid first.
Account opening fee = 1 kina per CBU passbook W ithdrawal fee= 2 kina per withdrawal (to discourage people from taking out their balance) Earns interest at = 6% per annum Fee for replacing a lost CBU passbook= 3 kina No minimum balance required; but on the second year, minimum balance of 30 kina will be required; otherwise a service fee will be charged, at 50 toea per month
School fee savings account (SFSA) is optional for members to open. The purpose is to allow members to save up for the annual school fee payments.26 Most households are
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Page 37
----------------------------------------------having difficulties in raising money every year to meet the school fees. There is a strong desire among them to save up for this purpose. Any amount of deposit can be made at anytime, but withdrawals are not allowed generally except when it is time to pay the school fees, which is every December and January of each year. Ginigoada will make the payment directly to the school. A member may open up to four SFSA accounts for her children, though for simplicity, it will be preferred that members maintain one SFSA account per household.
Account opening fee = 1 kina per SFSA passbook W ithdrawal fee= 2 kina per withdrawal Remittance fee= 3 kina, to deliver check/money to the school of the members child. Earns interest at = 4% per annum Fee for replacing a lost SFSA passbook= 3 kina No minimum balance required
One special feature of this SFSA account is that Ginigoada will pay directly to the schools bank account the school fees due on a members child. It will save the member the hassle of paying the school, while at the same time it will earn some fee incomes for Ginigoada. Investment savings account (ISA) is optional for members to open. The purpose is to allow members to save up for major investments. It works like a time-deposit.
Account opening fee = 1 kina per ISA passbook W ithdrawal fee= 2 kina per withdrawal Earns interest at = 7% per annum Fee for replacing a lost ISA passbook= 3 kina Minimum balance required = 100 kina
Printouts of statements of accounts on any of the savings accounts above can be made, if requested by the client, but at a fee of 1 kina per statement.
5.2 Features that make savings products attractive

The survey revealed that people want certain features in savings products like safety of capital, accessibility, can be withdrawn anytime, ease of transaction, friendliness, etc. Ginigoada should design and operate the savings products in a way that attracts people to use them. Here are our recommendations:
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Page 38
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5.3 Credit services to be offered

There shall be only two kinds of loans: a) regular loan and b) enterprise loan, which is also called as small business loan. Regular loans intended for household needs or for small income generating activities; Loan size ranges from 30 kina to 300 kina for the first loan cycle, but the main determinant will be the savings balance of the member; the maximum loan size is up to the amount in the members CBU account, on 1:1 ratio. Salient features include: B 7 H8 * < /; = 6 < // : C 6 * < =/// Page 39
---------------------------------------------- :2 F 9 - . : ; :1 G 2 * . 8 0 <% . - - C :: ; . - = : ; %; '6 : ; = - : // ; 7 * )% < // ; 6 -= // ; : :C / ; %H -
A member of a savings group should be participating in a group for at least 1 month before she/he is allowed to take up her first regular loan. She / he must have saved at least K30 (minimum) in her CBU savings account before she can take up the first loan. For first-time loans bigger than 200 kina, the member should have participated in the savings programme for at least two months; for loans below K200, a minimum participation period of one month is enough. The applicant should be endorsed and approved by the whole savings group, which would need to verify first her need for money. Another requirement is that her loan size should not be too big that the combined savings balances of members will be insufficient to meet any default. Small business loans intended for small business, income-generating activities or microenterprises. This enables entrepreneurs to expand or improve their businesses. Requirements and terms are: > - 6 : ( B = :actively . . ; : - . 7 H8 * < // ; = * =/// ; - = 2 %; * - ; . C )% 0 %; . :- - . - - C :9 2 : ; '6 - : ; . -= - :F 1 G - : - B9& C -: 6 = // ; :8 = : ; : ; - = - : 7" = < =/// 6 0 :* // ; -C 6 // ; * . := %H . C C : : :C / ; C 6 C
The basis for the loan size is the balance in the members CBU account and also based on verified need. The gearing is 1:1.3 which means a member with a CBU account balance of
Page 40
----------------------------------------------1,000 kina can potentially borrow up to 1,300 kina only.27 However, for members dealing on an individual basis, the maximum loan size is 85% only of his CBU savings balance. Some members will not find this conservative policy of tying loan sizes to savings balances. But we feel that to the great majority of clients, this lending policy will not pose a serious problem, as demonstrated by the high volume of borrowings in many existing SLSs in PNG. To many clients, borrowing of money is not a desired option anyway, as they would rather build up savings and then withdraw it when the time for it arrives; like paying for school fees. There are also cultural elements to this also some ethnic groups, like the Tolais, would rather borrow money instead of depleting their savings account. They like the concept of building long-term savings as it provides long-term financial security. So some members may dislike the loans and simply withdraw their savings, which is fine and well, because GSLS would have provided him a valuable service of building up his savings his own capital. GSLS should NOT see itself predominantly as a lender but mainly as a provider of savings services. The most important point behind this conservative lending policy is to protect GSLS against the loan defaults and serious loan losses. Given the poor repayment culture prevailing, we believe that this is the best lending policy to adopt during the first 3 or 4 years of operation.28
5.4 Loan verification and appraisals

Need for verification. No field verification by the Ginigoada staff is required for all regular loans because such loans are 100% secured. But the group members should make the verification on behalf of Ginigoada. On the other hand, verification and appraisal is strictly required on all enterprise loans beyond 300 kina because there are some risks involved. The FO and/or Branch Manager (BM) should visit the client in her home or in her business place, and inquire in detail about the business, probing the length of time she has been running the business, the management ability of the borrower, and the cash flows generated by the business. The household expenses are also considered. The applicant should be running her/ his business for at least one full year (12 months) because GSLS should not invest in start-ups which are more risky. If the FO or BM is unsatisfied about the character, need for a loan, the repayment capacity, or the stability of the business, then the loan application shall be denied. To further mitigate the risks involved, the borrower may be asked to put in some chattel mortgages as collaterals for the loan. The Field Officer or Branch Manager may require
27
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6 7 0 8 = :- - . . -
Page 41
----------------------------------------------chattel mortgage (fridge, TV, motor) or even some soft informal collateral from the member (pigs, furniture, etc.)29 This is especially true if the loan size exceeds 500 kina. We dont recommend lending to a household which is 100% dependent on agricultural or livestock production because the cash flows from its farm work would not exactly fit the repayment pattern required by the programme. However, in cases where a household has multiple or assured sources of income, where the husband, for example, has a formal job and the wife wants to get a loan to raise pigs or chickens, then a loan may be allowed because the household has a definite cash income source that can possibly meet the weekly installment payments. In these cases, the FO should conduct a detailed verification of the household income. Brief guide on background checks: When performing loan verification, the FO or Branch Manager shall follow a standard procedure. The FO or BM should ask some people in the community and examine the following: >- E E @ $ @9 . - : = :- : . 9 ; A :- : = : A . = : = :. = = . =9 - : -= - : 4 : : @ = :- 6 E =. - :
5.5 Managing caseloads of Field Officers

The Branch Manager should carefully manage the FOs with regards to their caseloads, making sure that they are not under-loaded or over-loaded with cases. The right balance of loans should also be attained. FOs should have more regular loans because they are fully secured by members CBU account that makes this type of loan essentially risk-free. This will make it possible for Field Officers to manage a fairly large number of regular loans. Our financial model shows that the average client caseload for regular loans is around 435 loans per year on the third year of operations and 614 loans on the fifth year. See Table 5- Analysis of caseloads of Field Officers. This is not unrealistic given that a ENBSLS Loan Officer carries a caseload of 700 loans per year.30
3 & 7 8 = B -
; =9 -
= ;
6 ; 6 ; . 2 - 5 = = ; . 'B -
"9= -
* ; 7 . 8 6
:
/
- - = :- - :
- -
Page 42
-----------------------------------------------
Table 5- Analysis of caseloads of Field Officers

Analysis of Borrowers:
# of members taking Regular Loan Percentage Year 1 1,285 91% Year 2 2,696 87% Year 3 3,914 88% Year 4 4,428 88% Year 5 5,529 89%
Average caseload of FOs

# of members taking Enterprise Loan Percentage
143
125 9%
300
394 13%
435
513 12%
492
601 12%
614
661 11%
Average caseload of FOs

Total number of borrowers
14
1,410
44
3,091
57
4,427
67
5,028
73
6,190
On the other hand, the enterprise loans carry some risks, and they require significant amount of efforts and time to manage in terms of verification and appraisal. Given these, we dont recommend that Ginigoada extend a lot of these enterprise loans, to minimize overall risks and to increase staff efficiency. Our financial model shows that the average caseload for enterprise loans is 57 loans in the third year and 73 loans in the fifth year; see Table 5Analysis of caseloads of Field Officers - above. We consider these caseloads as moderate and reasonable. In terms of proportion, around 90% of all loans will be regular loans while 10% will be enterprise loans, which is a good balance because FOs should have more regular loans which carry no risks. Consistent with the findings of the market study where we found that loan sizes will be small, we expect that the average loan sizes will start small in the first year; averaging 78 kina in first year for regular loans and 106 kina for enterprise loans.31 Then it will gradually increase; see Table 6 - Analysis of loan sizes - below.
Table 6 - Analysis of loan sizes

Analysis of loan sizes
Regular Loan Enterprise Loan
Year 1 78 106 Year 2 210 281 Year 3 358 470 Year 4 396 581 Year 5 346 565
5.6 Future products

School children savings accounts: We recommend that the School Children savings accounts be offered after the operations have stabilized, which can be sometime in the third year of operations. Essentially, this kind of account operates like a Budget savings account, but it is held by school children, to encourage a habit of thrift; but no loans are allowed.32
7:: ' .
. +/H -
* . . ; -
: 8:
/H
; : = :-
. : 7:- //H ; 9 2 = .
8 -
=:
Page 43
----------------------------------------------Bigger loans: The credit products above are designed so that it will fit the needs of a wide range of people in various situations or livelihoods. However, there will be people already in business who need bigger loan sizes, say K3,000 or K5,000, who are unwilling to put in so much savings into GSLS in order to get a loan. They need a business loan, for example, to buy a freezer or a high speed sewing machine, or a lathe machine, or a small pickup to expand or improve their business operations, or increase their trading volume33. For them, we recommend that GSLS conduct a study in the third year of programme implementation and see how their needs can be met. An Individual Lending Programme maybe developed, which will provide bigger loan sizes, and secured by appropriate chattels or assets or highgrade securities. We do not recommend that GSLS serve this market segment, at least during the first 2 years of programme implementation. Micro-insurance products: We found out that costs of burial are quite high in Port Moresby, and people try their best to bring home the body. The high transport costs (airlift) and the attendant post-burial ceremonies and costs make burying the dead a big financial drain on most households.34 Though the wantoks and family members help out in financing this need, this study revealed that the poorest and most disadvantaged households can not raise fully the needed amounts for burial. We recommend that, on the second year of programme implementation, Ginigoada should consider offering a simple, basic life insurance product35, which will pay an insurance benefit to the family of a deceased member. As an illustrative example, see below:
Members will be asked to pay a certain fixed amount of contribution each year, to a pool of money called as Mutual Aid Fund (MAF). If a member dies, the family gets a life insurance benefit (probably amounting to 900 kina) less any unpaid loans with Ginigoada. If the spouse or designated child of a member dies, then one-fourth (225 kina) of the usual benefit will be paid to the family. The payment of the insurance benefit shall be done by the Branch Manager or a ranking Ginigoada officer through the village elder or magistrate in a public gathering. This will ensure that villagers will see that Ginigoada really takes care of its own people. Under the local cultural context, helping a family in bereavement is an admirable characteristic of a person or institution.
The exact benefit value and the premium payment will have to be set later on, because data on mortality rate, payback amounts, processing costs, investment incomes, loss estimates and risk-mitigating costs should be carefully analyzed first, by the Microfinance Technical Advisor or by a qualified actuarial expert. One advantage to Ginigoada is that the risk of losing loans due to sudden death of members is practically eliminated.
5.7 Flexibility in mixing services at the branch level

33
; : . 6 : -
"#$ 7 . . . F ; G B , : : -
: - - 8- . : - "#$ = = :: F = . : G 7 - # =
: "#$ - # ; .
: -
. ; =: - ; . 8
- , -
%=///
/=/// ; - . :
B : : : -
. : "9 .
Page 44
----------------------------------------------The survey showed evidence that there are differences in the demand for financial services by the different ethnic groups. Some groups will demand more loans than others because the former have more businesses on the ground. Some ethnic groups will be depositing more cash into their savings accounts than others because they have flourishing businesses. Given this, the Branch Manager will be given some degree of flexibility in offering the services to ensure that the branches fully meet the needs of the target market segments. Individual savers and borrowers shall be served also through payroll deductions schemes, where their savings deposits and loan installments are deducted automatically from their fortnightly wages. The Ginigoada microfinance organization should install these payroll deduction schemes on the second year of programme implementation.
Page 45
-----------------------------------------------
' (
This chapter describes Prevailing interest rates in Port Moresby Recommended interest rate on loan products Rationale behind this pricing policy Access is more important than price Enhanced services and fees
Page 46
-----------------------------------------------
Chapter 6 Pricing policies

6.1 - Prevailing interest rates in Port Moresby:
The interest rates in the capital city are generally high, reflective of the high cost of money and the high cost of doing business; see below some examples: 3 ; E 2 ' # 0 2 0 0 0 7 % %H = // H /H /H # 80 ! H !H + H /H H = )
0 // H
6.2 Recommended interest rate on loans

We recommend that Ginigoada charge the following charges and fees: ' 2 # & . = 7: - - = : - : - : 0 = 0 ! ; :- - : 8: . 8 : 1 % % 1 : . . : = :- )H 7 & B
6.3 Rationale behind pricing policy

Given that we are used to low interest rates prevailing in the formal capital markets, it is natural for us in the formal sector to remark, Hey, that 36% is too high!! But poor people do not operate in the formal markets. They operate mainly in the informal markets where
)
03 ; >
"9 . . - - H : . ( . . - : . . ' . 8 +/ !H = :- - - - - . . : = : . H 9 2 B /H
37
F /H -
- ; >: = . G :. =. = . ' ; 7 - C :. . C ++H : :9 2 - . -
Page 47
----------------------------------------------interest rates on loans range from 800% to 1,200% per annum. Hence, to a poor person the above rate of 36% looks very cheap when compared to the 1,200% rate he usually get from the village moneylender next door. The principle of full cost recovery is at the heart of pricing among all microfinance institutions and among all sound business organizations around the world. That simply means: we charge the clients what it really costs us to deliver the service to them. If it costs you 3 kina to make one pizza then charge that price; why charge 2 kina per piece when your real cost is 3 kina? If you insist in charging 2 kina apiece, then in 2 weeks time you will be out of business. The service Ginigoada is delivering is a kina lent. Then how much does it costs to lend one kina to a poor person? Delivery of microfinance services is generally more expensive than the delivery of commercial banking services if brought down to a per kina basis. A commercial bank lending 1 million kina to 3 or 4 big customers may spend maybe around 20,000 kina over a one quarter period. The bank bears little risks because the loans are fully secured by high grade collaterals. But a microfinance institution delivering 1 million kina of loans to 4,000 people may have to spend around 150,000 kina (in a quarter) because the latter has to employ many people to disburse, monitor, collect and record many small loans. Plus the risks are far higher because micro-loans are generally unsecured. Cost per kina lent is 2 toea (2%) for the commercial bank while it is 15 toea (15%) for the microfinance institution. See the big difference? That is the reason why in all countries microfinance lending rates range from as low as 30% to as high as 70% and they are generally higher than lending rates of commercial banks. Even the very big and efficient operators like Grameen Bank and ASA in Bangladesh where labor cost is cheap and which has reached gigantic scale (serving millions of poor people) charge its clients 30% pa. It does not help that labor cost in PNG is high compared with other Asian countries. See Table 7 and notice that salary costs alone for an 11-person branch office is nearly 11 times more expensive when compared with Bangladeshs costs and nearly 3 times more expensive than Philippine MFI costs. When the costs of power, fuel, rent, supplies, employee benefits and other basic costs are factored in, then easily PNG operating costs is 15 times more expensive when compared with Bangladeshs costs.
Table 7 - Comparison of salary costs

PNG Kina 1 2 3 4 5 6 7 8 9 10 Branch Manager Data Processor Teller Field Officer 1 Field Officer 2 Field Officer 3 Field Officer 4 Field Officer 5 Driver / maintenance Guard 1 1,200 700 700 750 750 750 750 750 500 240 Bangladesh Taka 4,500 1,300 1,300 1,200 1,200 1,200 1,200 1,200 500 400 Philippine pesos 6,500 4,500 4,500 5,000 5,000 5,000 5,000 5,000 3,000 3,000
Page 48
----------------------------------------------11 Guard 2 TOTAL in local currency Cost expressed in US Dollar Foreign exchange rate used 240 7,330 2,443 0.298 400 14,400 232 0.0161 3,000 49,500 900 0.0182
Based on our financial model, a microfinance operation in Moresby, following the savingsbased approach methodology described above will NOT become viable if it relies entirely on interest income and even if a rate of 36% per annum is charged. Multiple income sources are needed to make it viable; see Table 8 - Analysis of income streams - below.
Table 8 - Analysis of income streams

Sources of income If taken as a whole 5-year period
Branch #1 Branch #2 34% 25% 41% Average 32% 25% 43% 30% 25% 45%
If first 2.5 years were considered

Branch #1 23% 29% 48% Branch #2 35% 14% 51% Average 29% 21% 49%
Interest incomes on loans Fee-based income Investment income
Interest income over a 5-year period will constitute 32% only of total income. Interest income should be supplemented by investment income (43%) and fee-based income (25%), otherwise it can not work. Interest income alone will not be sufficient to cover all costs involved given the high costs of operation in PNG. This emphasizes the point of lowdependence on loans to generate incomes for the MFI, and also the point that a substantial capital infusion is needed at the start of the programme because without that this programme will not work. During the first two and half years of operations, interest income would be even lower (29% only) because at that time the loan portfolio has not grown big enough. Whats the reason behind this? The reason is that loan uptake in a savings-based microfinance programme is slower and the loan sizes smaller (remember, loans are based on savings). Hence, the amount of interest earned is much smaller compared with a microfinance programme that is heavily credit-driven. Here are two examples: An ASA branch (Bangladesh) is able to reach a large portfolio size and become financially viable in just 9 months of operation and it relies 100% on interest incomes. An ASKI branch (Philippines) becomes viable after 2 years of operation, with 100% reliance on interest income. The reason why some provincial SLS in PNG are profitable in spite of the low interest rates they charge is that they have already built up a very sizable savings portfolio which they invest in T-bills and other safe investments, to generate substantial investment incomes. They also received hefty seed money from their sponsors, usually provincial governments, when they started operations. Some SLS have also become very efficient on loan management, like the ENBSLS, where each of their Loan Officers handle 700 loans per year, hence generating very substantial interest incomes. Options on interest rates to be charged: We ran a sensitivity analysis on our financial model to see what will happen if Ginigoada charge various interest rates, either higher or lower than 36% pa. The results are in Table 9 below. You will notice that as you lower the Page 49
----------------------------------------------interest rate used, the viability is pushed back to a later period. For example, if 20% interest rate is used, the viability point will be reached by 17th quarter.
Table 9 - Effects of charging various interest rates

a b c d e f Options on pricing #)H #/H #!H #/H #H #!/H : : : : : : probable results (based on financial model) . +- 1 = < = -1 . = < =%+ -1 . = < /=+/ -1 . = < /=+/ . /- 1 = !- 1 . +- 1 = < //% -
The longer time a microfinance institution takes to become viable, the less likely will it become viable because of the many risks involved; hence, it is always good to attain viability at the earliest possible time. Given these, it shows that by charging either 36% or 40%, the microfinance programme will attain viability at the earliest possible time given our specific set of conditions and assumptions. But we would recommend 36% pa rather than 40% because there is no time advantage gained. Therefore, 36% pa seems to be the optimum choice. It is best, however, to lower the interest rates once the institution has gained stability and viability. Therefore, we recommend that the interest rate be lowered to 30% pa beginning in the fifth year of operation, when by that time GSLS has firmly established. It is like giving the clients an efficiency dividend.
6.4 Access is more important than price

To poor people, access is more important than the price of loans. Many research studies in the past have confirmed that people are not price-sensitive. People are willing to pay high interest rates to lenders, even to moneylenders, just so they can get quick and easy access to loans. As stated above, if the same access is given to poor people at a substantially cheaper price (36% per annum), then there is no doubt that people will patronize the financial services offered by Ginigoada. We conducted a survey in Port Moresby consisting of 10 randomly selected microenterprises. We analyzed the data they provided us, and we found out that the average return on sales is 51%, and average return on capital is 461%; see Table 10 Profitability of various micro-businesses in NCD- below. These show that microenterprises are really very profitable economic activities, and because they earn on the average 461% profits on their capital, then they can easily afford to pay an interest of 36% or even more on borrowed capital. We expect that demand for business loans from such people will be high.
Table 10 - Profitability of various micro-businesses in NCD
selling fresh fish selling of dried tobacco selling of self-sewn meri blouse selling of second hand clothes
36% 41% 64% 50%
1,380 1,000 1,080 1,500
170 400 120 750
812% 250% 900% 200%
Page 50
----------------------------------------------fresh vegetable distributor cloth screen printing selling kneatings, bilums, etc selling cigars, cold drinks, etc. trade store + fast food vegetable retailing Averages 64% 40% 55% 35% 66% 55% 51% 2,700 960 3,600 2,240 1,500 480 1,644 5,000 150 800 300 2,000 100 979 54% 640% 450% 747% 75% 480% 461%
6.5 Enhanced service and fees

The Ginigoada microfinance organization should aim to enhance the service of disbursing loans to members, and beginning in the second year, it should be able to process loans on the same day using greater automation on balance checking and preparation of loan checks. It is known that individual savers and customers in NCD are willing to pay a premium fee to get their loan checks as quickly as possible.38 Given this premium service, it could charge the following service fees:
5 kina service fee for a loan size 50 to 100 kina 15 kina service fee for a loan size 101 to 150 kina 20 kina service for a loan size 150 to 250 kina 25 kina service fee for a loan size 251 to 350 kina 30 kina service fee for a loan of 351 kina and above
This will improve the fee-based revenues of the organization.
B -
2 =
%;
- ;
Page 51
-----------------------------------------------
) *! +
This chapter describes Various organizational forms that are available Pros and cons of these various organizational forms Recommended form: Savings and Loan Society Organizational arrangements among the four key actors Formation of the new Ginigoada Savings and Loan Society Governance of the new SLS Developing a development philosophy for the SLS
Page 52
-----------------------------------------------
Chapter 7 Organizational arrangements

7.1 Various options that are available
We see three options for Ginigoada regarding the organizational aspects of this proposed microfinance programme. They are as follows: (a) operate it under an NGO setup but with agency banking arrangement with a licensed local bank; (b) operate it under a Savings and Loan Society setup; (c) operate it under a Licensed Financial Institution setup;. These 3 options are discussed briefly below.
Option 1 Operate it under the NGO registration but with an agency banking
arrangement with a local licensed bank : * 3 1 ; : "9( ; 9 : "9 & ;=
3 ' > -
& : = &"K B ; . ; 3 "9 7:- 8= - 93$' . - < ? 7<?'8 7 - : (; $ . ' 8 :- - ; : - &"K <?' : - &"K ; < = . B ; ; 7 ; &"K ; 8: 93$' : :- &"K ; ;7 - 3 "98 : : : - - 5 . - . 93$' : - . ; :- - : = - 93$'
Option 2 Operate it under a Savings and Loan Society (SLS) setup.

D 2 & = 93$' : ++%G & . := . 7 2 8 2 - F F .
1 .
3 "9 -
2 C 93$' .
B : 6 '&#
= . = :- . : 7 "9 &$3 2
: - %// - 2 3
* 7', &2( 8 & % 3 # -' : - G G : 2 C := F G - 2 : :- : = 2
- ' 5 = = :! : : & =B 8: .
- 93$' & : . 2 . . - 2 - 2
= . : -
----------------------------------------------Page 53
----------------------------------------------: - . . 2 2 = := . : : - 2 :
Option 3 Operate it under the Licensed Financial Institution (LFI) setup

D : - - B . F3 ; 2 ' B ; : & ' B 72'B8 :- : & 2'B = :- C- : . = : ; =9 = F9 2'BG - 2'B : - - 3 "9 2'B & ///G "9 : . = - - 3 "9 1 ; . 3 "9 . 2 % -
Table 11 - Pros and cons: various organizational forms 1

"9( : ; : ; . & "9(= 6 = = F ; ;C 5 3 "9 G ; ; . ; ; . " = * C 1 . 3 "9C F = 6 : G : C 9 : = ! . . 9
" &
5 . 3 "9C "9( .
4 . =
: -
. 7 & 2
9 :
Page 54
---------------------------------------------- # & . . 1 . <%/// & 5 . 2'B - 3 "9C . . : . = 5 . * . 2 = . 3 "9 . : . +
2 B
'
4 =
3 1 =< % -: 6 C = : ;C ;
. G -
. F
7.2 Recommended structure

Given that our primary consideration (consistent with the strategy) is to have a corporate vehicle that allows collection of savings, the conduct of financial intermediation, and which will have a strong motivation to operate profitably, the SLS seems to provide the best fit and optimum solution. Here are 11 reasons why we chose the SLS option: 8 & 2 = : . - 3 "9 5 6 . . ; - 2'B 6 2'B - .
!/
- 2'B 7 <%=///
!
. . 8 : = 9 2 = ; ( &
: . 9 & .
= E 9 = 2 :
- 3 "9
3 9
2 & - -
"
!/
- 2 2 = H . : ; - = :- 6 6 ; = -
:1 2 . : ; . 0 C . 2 . : 2 - :
L -
B .
= - -
: 0 C
= 6 =
0
!
B 8
- 3 "9
"9 &$3 '
5 B 72'B8 -
6 >
Page 55
----------------------------------------------8 9 . 2 C ( 8 & 2
!
6 7:- ; #-
&
. . . # 2 C9 8 = .
. C
. = - :2 = 2 - . - ; : 6 * * : - -
1 B
; 2'B . .
= -
!8
: ', &2( 2 E . 2 = - -
* ; "9 'B
= : - -
2 :- . -
: 1 ; :
%8 & "9 . .
. 6 :- 5 : B : F = "9( - . G : ; F . . C 2 . . = .
. 1 2 > - - = . = "9( -
- . )8 ( ; -
. - - 9 2 :
3 "9 : -
- . -
8 3
5 1 = . : : : - 9 2 : E ; 3 "9 E . . ; . & 1 -
. : : -
3 "9 ; : 2
= .
- 3
# . -
: . ; : - : . - .
E - 9 2 - . & "9( : = :- - :
73 "98 .
8) > -
. -
= 2
- - "9( & ++%
- . F he
Registrar, or a person authorized by him, shall inspect and audit the accounts and records of financial transactions of a society and records relating to its assets or assets in its custody, and shall promptly draw the attention of the societys Board to any irregularity disclosed by the
, - 2 : F
- . = . G
%//
= %// ;
"
: :
: - ; /H
-= ?
Page 56
----------------------------------------------inspection and audit that is, in the opinion of the Registrar, of sufficient importance to justify his so doing.
+8 -
! * -
: = . F
- . -
- : - 2 -
. : -
2 .
; :
. 8= . . 2 : . /8 # = F . : . ! : ! 7 /8 5 . - - 2 2 2 G & F " # B : . !
:: . : 9 . 2 = -
7 -
:- =
2 -
8 -
>7 : - -
- 2 - . B - : = -
6 ;
H :! " G . 2 "9 -
7)8
. - F :
- -= ++%G = F ! : 2
"9
> !%H ; ( 5 "#$8 > . : : 6 9. : ; ; - - "#$ - 8 B 2 72'B8 :-
; 6 :- - %%H ; 6 H - : - . . - - 7:- - . . : :: - - 2 3 - - - = :; . . . 3 "9 2 = : * 1 = - . =: 2 . "#$ # . - 3 "9 : = & &B$ ; . = :. - . 2 : . H :.

!!
* = : ; .
. : - :
:2 2 .
2'B=
: ; - 2 & :-
' -
- F - & = -
G - :-
= :- 2 & : = : -
!!
'
6 ;
= - ,"3 2 ;G -
: ;
: - - :
- 2 6
= :- .
Page 57
----------------------------------------------Given all of these, we recommend the second option the SLS option because it provides the best set of advantages. The disadvantages are minimal which can all be counter-acted. Furthermore, there are some successful SLS models in PNG to learn from and reputation of SLS in NCD is positive.45
7.3 Organizational arrangements

There are four major actors AusAID, PNG-ADB Microfinance Project (PAMP), GBDF and the Ginigoada SLS. We prepared an analysis of the possible organizational arrangements or configurations on how these four actors can work together; we see essentially three configuration options, see blow: Configuration Option # 1 - Channel AusAID funds through the GBDF which will then release the funds to GSLS, with PAMP playing a minor supportive technical role; GBDF will provide direct technical support, and will directly supervise operations of the GSLS, and will hold 20% of quasi-equity in GSLS by considering 20% of AusAID donations to GSLS as long term subordinated debt to GSLS; GBDF will also provide non-financial services like training to clients. Configuration Option # 2 - Channel AusAID funds through the PAMP, which will provide both financial and technical support to GSLS; the GBDF will play a minor role in terms of provision of direct training services to clients. GBDF will hold 20% quasi-equity in the GSLS. Configuration Option # 3 - Same as configuration number 2 above, except that GBDF will not hold 20% quasi-equity from AusAID donated money, but shall invest whatever assets it has now (vehicle, computers, vault, etc.) to GSLS as quasi-equity; and GBDF is treated just like any other shareholder of the SLS, in terms of distribution of dividends and profits; In all three options above, GSLS will be the service-provider at the ground level, providing financial services to the clients. GSLS, however, will not provide any training services or significant non-financial services (except the social intermediation services described in Chapter 14). Below is a table comparing the various pros and cons; the advantages were based mainly from the perspectives of the donor and the ultimate beneficiaries - the clients at the grassroots.
Table 12 - The pros and cons of these 3 configuration options

Configuration option Advantages Disadvantages
!%
. 2 =& " . . : & : 2
2 2 : :
"#$ ,
1 2 : & = "#$ - .
'
6 ;
= =- . -
! -
2 -
"#$ = -
= - "& 'D"$ 2
- E 2 = - . . =
Page 58
----------------------------------------------Option 1 - Channel financial resources through GBDF, with PAMP playing a minor technical supportive role; GBDF will also provide nonfinancial services like training services
The GBDF will be involved in the provision of financial services (indirectly) and training services (directly). GBDF can have an assured source of income, in terms of administrative fees, at least during the first 3 years that it is overseeing the GSLS; GBDF currently has no internal technical capacity to supervise a microfinance programme; Given that it has no secured funding support for the next 3 years, GBDFs financial status is unclear and shaky, and its own existence is in question. GBDF financial management capacity is unproven given its track record on the training service provisioning. GBDF may be overloaded if it performs both financial and non-financial provisioning. Given the above weaknesses of GBDF, AusAID will have greater administrative burden in overseeing the programme; The current lifespan of PAMP is up to September 2006, and unless extended, there would a gap in the third year of GSLS sponsorship period. The GBDFs 20% quasi-equity will reduce the amount of benefits received by the thousands of members of the SLS because a big chunk of the net profits will be going to GBDF.
Option 2 - Channel financial resources through PAMP which will provide both financial and technical support to GSLS; GBDF holds 20% quasi-equity in GSLS and GBDF focuses on provision of training services
PAMP has the proven technical expertise and financial management capacity to directly supervise a microfinance programme; Given the capacity of the Project, AusAID will carry a lighter adminis trative burden in overseeing the programme; AusAID has already an existing co-funding arrangement with the ADB, which will create greater efficiencies. The 20% quasi-equity holdings of GBDF in GSLS will provide it some dividends in the future to serve as its core operational money; Same advantages like Option 2. The GBDFs take on profits generated by GSLS will be lower which will be an advantage to the thousands of members of the SLS because they will receive more of the net profits generated by their own SLS.
Option 3 same as 2 above, except that GBDF does not hold 20% quasiequity but instead invest whatever assets it has in GSLS and earn profits just like any other member of the SLS
The current lifespan of PAMP is up to September 2006. GBDF will have less financial resources in the future if it has no 20% quasi-equity holdings, and its own survival as an organization will be at risk;
Based on our own appreciation of the various pros and cons, we recommend that Option 2 above be adopted, because it has the best set of advantages, namely (a) it will mean a lighter administrative burden for AusAID which has limited staff, time and expertise to be directly involved in close-range oversight and supervision; (b) It also makes effective use of the technical expertise already in place in the country through the ADB Microfinance Project; (c) greater amount of efficiency can be achieved because AusAID is already co-financing the ADB project, hence it will save time and efforts in terms of reporting and supervision; (d)
Page 59
----------------------------------------------GBDF will be able to focus on its own niche of providing training services, and it will have some seed money, albeit small, generated each year from the profits made by GSLS. To address the weaknesses of this option, here are our suggestions. The sponsorship of GSLS can be completed before the end of the lifespan of PAMP, and the balance of all funds remaining by September 2006 can be released to GSLS. Another option is to turn over the sponsorship role to the Microfinance Competency Center (which will the institution left behind when the PAMP close down) or to the PNGIBBM, whichever is feasible; anyway, the remaining period is 1 year only, hence will not make much difference. Regarding the issue of division of profits, GSLS would have to convince its own members that, though, they receive less profit from their own SLS, they also benefit from GBDF in terms of getting some training services. GSLS members will need to make GBDF accountable for those funds, making sure that the GBDF training services truly benefit the poor or the low-income communities. The quasi-equity investment would also be made non-withdrawal on the part of GBDF and it would have to stay permanently in GSLS to avoid impairing capital base of GSLS.
Diagram showing organizational relationships of the four organizations

DONOR AusAID
ADB
PNG Govt
ADB Microfinance Project (PNG)
Ginigoada Bisnis Development Foundation
Ginigoada Savings and Loan Society,
Clients
Table 13 below shows the various specific roles of each of these four actors based on the recommended configuration option above.
Table 13 - The roles to be played by the four actors

ACTORS AusAID . &A9 - $9 C ROLES TO PLAY 9 2 - - &$3 C 5 -
Page 60
---------------------------------------------- PNG-ADB Microfinance Project (PAMP) . & 2 . : 6 . - 9 2 C 2 = 5 . : =
4 - 9 9 2 = 5 - - 2 9
& . -
GBDF
GSLS (GSLS)
= - $ = . > ;: - & - 2 :- - 2 3 $ . # = . 93$'= 5 3 "9E . C & - $ 9 - 2 = . 93$'= 5 . - 3 "9C & . C - 2 = * . C - 2 B . - 2 . . : . - - 9 - 2 C . : . C 2 : - 73" 98 : - . :1 " 1 - 2 . # = " - $ 9 - 2 = - $9 - 9 A & . ; . 9 - 2 - 9 A & . C 5 . : . . 9 2 = # . : -9 2 . = ; # 9 2 . . . 93$'= &$3 & &B$ = :- . 1 - 93$' . 93$' E = . :
&8= :- . - 3 "9 ; . 4 : ; . - 9
&E
There is a need to have a clear and definite web of formal relationships among GBDF, AusAID, PAMP and the GSLS, where their respective roles are clarified.
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----------------------------------------------In the event that the BPNG would not provide a broad exemption on the 12% interest cap, even after a strong case has been made by AusAID, ADB and Ginigoada, then there is no choice but to abandon the SLS option; and the final fallback position is the LFI option. There would be a need to increase a bit the budget of the programme given the high initial capitalization required (1.5 million kina). Therefore, a flexibility clause must be included in the agreements between AusAID, ADB and Ginigoada to allow for an increase in donated equity due to higher initial capital requirements of BPNG. Given the lack of technical skills and experience within the country, we recommend that an expatriate expert, to be called as Microfinance Technical Advisor (MTA) will be selected and hired by PAMP in consultation with AusAID and the GBDF.46 The MTA will be assigned to head (as General Manager) the new GSLS (to be called herein as GSLS), at least during the first 30 months of operations. His primary mandate is to establish the microfinance institution, train the staff and managers, and put the microfinance institution in a clear path of financial viability. His special mission is knowledge transfer; to train the Deputy General Manager, who shall eventually replace him after he leaves the country, at the end of that 3year period. GBDF will nominate the right person to be the Deputy General Manager, where final approval will come from PAMP and BPNG. The DGM should have the right skills, attitude and intelligence to eventually become the GM. 47 After securing those commitments, and after having a clear agreement with both AusAID and ADB on the over-all direction of the programme, the new GSLS board and management should prepare a detailed 5-year Business Plan, which should include 5-year targets, annual targets, performance indicators, and complete pro-forma Balance Sheets, Income Statements and Cash Flow Statements. The timing for preparing this Plan should be right after the arrival of the MTA and the selection of the DGM to ensure their direct participation in setting the targets and other details of the Business Plan. The GSLS may also establish brotherhood arrangements with ENBSLS and other successful SLSs in PNG, in order for GSLS to learn from the experiences of successful SLSs. The PAMP should provide exposure visits to the GSLS managers and the MTA, so they can see what good things are working well in various SLSs in the country.
7.4 Formation of the SLS

After completing the Business Plan, the MTA, DGM and the initial core staff will start organizing GSLS by first enlisting at least 500 prospective members from among the interested people in the various settlements and villages in Moresby. The enlistment can be
!)
- : 3 6 &
. -
> . 9 2 :- : = ; -
- ; -
; . - ,"3 2
47
= -
9 -
; -
7$9 8 5 :- -
. 1
- ;
: $9 -
9 2 & 9
2 &
"9= : . . :
. $ & : ; $9 : : - ;
Page 62
----------------------------------------------done in conjunction with the social mapping exercise and/or with the initial public awareness campaigns.
Table 14 - Requirements for registering a SLS

(1) A minimum of 500 persons or such other number, qualified to be members of a Savings and Loan Society, who desire to associate themselves together as a group for the objectives specified (2) An application for registration shall be forwarded to the Registrar, together with (a) details of the proposed name and address of the society; and (b) a description of the group of persons to which membership is to be limited; and (c) a list of prospective members, together with their addresses and a statement of--(i) their qualifications for membership of the society; and (ii) the amount that each prospective member proposes to deposit; and (d) the name and address of the provisional secretary; and (e) a copy of the proposed rules of the society; and (f) Such other particulars as are prescribed or required by the Registrar. The membership of a SLS shall be limited to a group of persons having a common bond of occupation, association or interest or to groups of persons residing within a well defined community or area. A person who is a citizen; and not otherwise disqualified under this Act or the Rules, is qualified to be admitted as a member of a society formed in respect of the group. A person shall not be a member of more than one society. A person under the age of 21 years but above the age of 16 years may be a member of a society. from section 19 of SLS Act
The paper work will have to be completed, including the Sponsorship Agreement a document which spells out the type and amount of financial assistance and support that PAMP will provide to the GSLS. A draft GSLS Constitution should be prepared following a standard format prescribed by the Registrar. That Constitution, the sponsorship agreement and other papers will then be submitted, together with the application, to the Registrar. After securing a license, GSLS can start collecting savings. 48
7.5 Governance: the new SLS Board of Directors

The establishment of the new GSLS board should be one of the first priorities for the programme. The SLS must have a board of directors (BOD), a Loan Committee (members of which come from the board) and a Supervisory Committee (SC). The members of the SC do not come from the BOD. The BOD shall manage and control the SLS and shall formulate general operational policies and on investment policies. The BOD reports to the Registrar and to the BPNG. The Supervisory Committee shall be involved mainly in conducting audits of the SLS. We recommend a GSLS BOD of 7 members, and a SC consisting of 3 persons.49 All in all, ten people are needed in governing the GSLS.
!
9 .
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2 : - * -
. - * : . - 3 "9 B ( . # = // = - 3 "9 . - B & -
- 3 "9 " : 2 = :-
5 :-
( - -
Page 63
-----------------------------------------------
We recommend that the BOD of GSLS should have a reasonable mixture of PNG citizens and non-citizens, where PNG citizens have the majority in terms of numbers. At least one BOD member should have working knowledge of banking or financial management procedures and processes. GBDF shall make the nominations for PAMP to consider. We recommend a set of basic qualifications for GSLS board members; see Table 15 - Recommended minimum qualifications for BOD members - below. It is suggested that GBDF does not limit its selection of nominees from its own existing board members and alternates, but should expand the field of selection. The other electorates (North-east and North-west) should also have some kind of representation. GBDF may widely announce the opportunity through churches, NGOs, networks, etc. in order to get the best possible set of interested individuals. GDBFI submits its nominees to PAMP, which shall conduct due diligence and background checks on the nominated people, and shall ensure that the minimum qualifications as described in Table 15 below, and as per the fit and proper rule of the BPNG are met by the nominees.
Table 15 - Recommended minimum qualifications for BOD members

B . > > > 7 > & : = ; C = :- . . . 7; # . 8C 8C% 9 2 : ;: -1 = C : C%/ ; .
%
C =
After carefully checking the backgrounds of nominees, the PAMP shall conduct interviews with the nominees, and then select from among the nominees the people who shall comprise GSLS BOD, subject to BPNGs final approval. The main objective here is on developing a strong governance structure within the SLS, which can provide a clear and steady direction to GSLS to attain financial viability and large client outreach. Hence, selecting the right people for GSLS board is very important. Then, the PAMP shall meet with the selected BOD members and clarify the expectations, making sure that the BOD understands their role and responsibility. To have a workable mechanism of assuring board presence, at the beginning, PAMP should set a ground rule that a GSLS board member who incurred 3 consecutive unexcused absences in regular
%/
9 2 B -
-: -
51
>
- 9 2 =9 2
< -
C :.
Page 64
----------------------------------------------monthly board meetings will be asked to resign from the board, and there shall be a replacement picked within 45 days. This is to avoid a situation where the BOD can not decide on important business matters because of lack of quorum or because there are few board members attending the meetings. The qualifications listed above emphasize willingness to devote time and attention to the programme, which is a direct manifestation of commitment, without which GSLS will surely flounder. It is useless to have many high profile people in the board if they are too busy and have no time to spend for GSLS or the people they serve. The BOD will elect the officers President, Vice-President, Treasurer and Secretary. The Supervisory Committee shall organized itself, and prepare a plan to regularly audit the operations of the SLS. Preparing early the next leaders GSLS board will be there for 4 years only. After that period, when the Sponsorship Period ends, then a new board will be put in place; elected directly by the members. Therefore, to ensure continuity, GSLS board and management should spend time and effort in developing the next leaders. They must develop a pool of talented and dedicated leaders from among the grassroots people who can take over the leadership positions. As a mechanism to implement this, we recommend that GSLS create a 7 person Advisory Committee (AC) comprised of selected persons from the target communities. The AC will become their training ground; they shall be exposed to the operations of GSLS and observe, and in close range, how GSLS is being run by the board. The AC can provide suggestions and advice to the board also. The people in the AC shall be trained and groomed to become the new set of leaders. One advantage of this approach is that it will create a strong sense of ownership among the clients if they know that they have a say in how GSLS is governed, even during the interim sponsorship period. If there are interested GSLS board members who want to be involved with GSLS longer than the initial 4 years, then they should be encouraged to do so. They ought to get involved more deeply with the poor people. They simply have to be active in the SLS, meeting the poor people on the ground and being one with them. In that way, they can be known by the members and be elected as board members by the SLS members. This should be encouraged because of the need for continuity in the philosophy and direction of the GSLS. This mechanism also allows for greater accountability.
7.6 Developing a philosophy on sustainable development

GSLS would have a dual mission: It has to achieve financial self sustainability, as well as increase outreach, both in scale (number of clients), and in depth (reaching the lowest income population as possible).53 Whats the vision? GSLS board is essentially building an independent permanent financial institution in NCD; hence the board should see that it has a critical role in making that happen. The BOD should guide the SLS so that it becomes a strong and stable financial
Page 65
----------------------------------------------institution, permanent in status, self-sustaining, with healthy finances, with a wide and stable client base, and not dependent on external donors or government. How do we go there? The new GSLS board will need to develop a clear development philosophy that will be the operational guide on how GSLS will attain its vision. What is this philosophy? The philosophy would include practices of treating the members, not as social welfare beneficiaries, but as paying clients or customers that demand respect and high quality service from the staff. It will include market objectives like developing the market by building up the client base through a number of social intermediation techniques; hence will include details like teaching clients about financial discipline, hard work and paying obligations on time. It includes setting and attaining performance targets, monitoring Key Performance Indicators on monthly basis; providing rewards to staff for good performance. It includes establishing a value system that emphasizes integrity; that is tough on loan delinquency, fraud and unethical practices. In short, GSLS should spend adequate time, in the beginning, to formulating and discussing among themselves and with management staff about this development philosophy. GSLS board and management should define the details of this philosophy including the key operating principles. Board members and managers should internalize this philosophy. Without a clear philosophy, GSLS will run like a ship without any definite plan to reach its destination. There will be contentions and fights on which way to go and how to go. This philosophy will need to be reflected in the Business Plan.
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-----------------------------------------------
,
This chapter describes Basic infrastructure to deliver services to target groups Organizational structure of the SLS Branch office location and equipment Social mapping exercise to identify market segments Collaborating with existing networks and bodies
Page 67
-----------------------------------------------
Chapter 8 Infrastructure
8.1 Basic infrastructure
We recommend a basic service delivery infrastructure of two offices only: Branch Office No.1 and Branch Office No.2.54 The Head Office will be attached to Branch Office No.1, meaning they share the same office space, but with separate rooms, to save on costs. Timing: The two branch offices will not be established at the same time. GSLS will first establish the first branch and the head office in one location and try out the methodology. After a period of 5 or 6 months, then the second branch office will be established. This is to provide some time to test out and refine the methodology, approach, financial products, tools, and systems, based on actual field experience. Location The location of the branch offices shall be carefully chosen so that it is very close to, or near the target clientele. GSLS should carefully analyze the distance of the branch office to the residential areas where most of the clients live. It should be accessible; hence GSLS should study bus routes, bus stops, etc. Using public transportation only, the clients should be able to reach the branches easily. It should not be too far away. It should be, preferably, near a local bank branch, and preferably near a Police Station, for obvious security reasons. Places like Gordons, Boroko, Koki and Badili are prime candidates to consider. In terms of appearance, the branch office should be one which is professional-looking, attractive but not necessarily expensive. It should look like a typical commercial bank office. It should be properly equipped with the right security features to prevent theft.
9.2 - Organizational structure

The head office of GSLS shall have five personnel, as shown in Table 16 below. All of them will be on full-time basis except the Internal Auditor who can be hired on part-time status; the amount of audit work in a two-branch office configuration is not enough to justify a full-time auditor position.
Table 16 - Head office personnel

HEAD OFFICE
1 2
54
General Manager Deputy General Manager

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Page 68
----------------------------------------------3 4 5
Internal Auditor (part-time) Data Processor Driver / maintenance
The first branch office will be composed of 11 personnel, while the second branch office will have 10 personnel; see Table 10 below for details. The Branch Managers report to the Deputy General Manager, who in turn reports to the General Manager.
Table 17 - Branch personnel

FIRST BRANCH
1 2 3 4 5 6 7 8 9 10 11
SECOND BRANCH
Branch Manager Data Processor Teller Field Officer 1 Field Officer 2 Field Officer 3 Field Officer 4 Driver / maintenance
Guard 1 Guard 2
Branch Manager Data Processor Teller Field Officer 1 Field Officer 2 Field Officer 3 Field Officer 4 Field Officer 5 Driver / maintenance
Guard 1 Guard 2
The salary scale and the suggested salaries (for the first year of operations) are shown in section 13.3. The organizational structure is flat in each branch and looks like Figure 1 below: Figure 1 Organizational structure of a GSLS branch office
Branch Manager
Field Officers
Data Processor
Teller
Driver / Maintenance
Security Guards
The staff in the offices should be carefully chosen from the best educated people available in Moresby. For the position of Field Officers, preference will be given to fresh college graduates or those with little work experience. It is better to have young, fresh and idealistic people as Field Officers than have older, less flexible workers, who may have imbibe wrong working habits in their previous jobs.
8.3 - Branch office equipment and facilities

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----------------------------------------------Each branch office should have the required office and fieldwork equipment to enable staff to work efficiently and effectively. That will include computers, printers, cash vaults, air conditioners, teller booths, furniture, motorcycles, etc. 55 The Field Officers (POs) will be provided with motorcycles so they can travel easily and quickly to the various settlements / villages. The programme will require a total of four pickup trucks, and Ginigoada has already two units available and we assumed that GBDFI will put in (invest as quasi-equity) one unit of pickup to GSLS; hence only three units need to be purchased. The pickup trucks will be used for a number of things: to facilitate field visits, monitoring, field training activities, surveys, networking, collecting money from the villages, delivering money to the bank, getting mails, and various errands. Each office will get one vehicle. Annex G contains a detailed list of equipment needed by each branch, and the head office.
8.4 Social mapping for marketing purposes

There is a need to have a clear and detailed understanding of the market. As a first step before full implementation, GSLS need to identify the target groups systematically. GSLS need answers to various questions like: Where are our main clients? Where do they live? To what ethnic groups do they belong? How many are they? Where are the churches located? How big are those churches, and are there womens groups there? Where are the schools located? Which places have functional Village Courts? We recommend that GSLS conducts a social mapping exercise, in order to (a) identify the exact areas where the various peoples groups live, (b) understand the ethnic mix involved, (c) identify the public markets, schools, large work places; and (d) identify churches, womens groups, village courts, informal peace committees, ethnic-specific associations or committees. This is mainly for marketing and planning purposes, and will help ensure adequate coverage of NCD. During the SLS registration process, the BPNG would need detailed information on exactly where the SLS will be operating. To facilitate the social mapping exercise, Ginigoada may obtain basic data and information from the PNG census office and the National Capital District Commission.
8.5 Collaborating with existing networks and bodies

We found out the churches have established good and strong presence in many of the settlements and villages; operating with a large network of workers and parishioners from within the communities. Information gathered from many sources show that the best way to enter the villages / settlements is through the church network. The churches have many local leaders that can be tapped as point person. [A point person is one who has a very good understanding of the people in the community; one who knows the decent, hardworking people and those who are lazy, rascals and idle.] Hence, we recommend that GSLS make a special initial effort to locate the churches and build rapport with their leaders. They can be very good sources of leads, advice and moral support. We talked with leaders of several churches (United, Catholic, Baptist and SDA) and they are consistent in saying that they are willing to collaborate with Ginigoada in terms of helping set
%%
# =
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93$'
Page 70
----------------------------------------------up a microfinance programme in their respective communities. They also confirm that there are womens groups in their churches and they would probably be interested to form savings groups. Another source of leads and support is the network of Village Courts and informal peace committees. See Box 3 below to know more about these bodies. GSLS can build rapport with them, with the aim of locating starters for savings groups as well as securing their help in settling disputes or collecting unpaid loans from unruly borrowers.
Box 3 Village Courts and local committees

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-----------------------------------------------
- &
( .
Projected or expected results of this programme Key assumptions used in the financial model Financial requirements of the core microfinance Projected incomes and expenses for five years Projected balance sheets for five years Potential of becoming a micro-bank in the future Over-all financial requirements
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Chapter 9 Financial projections

This chapter discusses about operational and financial targets and financial projections for the five year period of programme implementation.
9.1 Projected results

The key operational and financial results (or targets) that we are recommending include the following:
Table 18 - Operational targets

Key Performance Indicators Year 1 Year 2 Year 3 Year 4 Year 5
" " ( ' ,1 " # # , ( # $ # &.
. : ( 7 (,8 7 . 8 '( 7 : 8 '( 7; # 8 '(
2,241 1,410 56% 55% -3.8% 249 157

9,704
4,092 3,091 84% 77% -1.5% 455 343

56,424
5,669 4,427 111% 93% 1.4% 630 492

143,837
6,848 5,028 116% 95% 2.5% 761 559

206,300
8,340 6,190 119% 96% 3.4% 927 688

254,077
81% 2.38 3.89 98.4%
90% 0.45 1.94 98.1%
95% 0.21 1.52 98.1%
98% 0.18 1.37 98.0%
99% 0.17 1.32 98.0%
Note: In our financial model, the donated capital coming from the donor is not included in the computation of Operational Self-Sufficiency (OSS) and Financial Self-Sufficiency (FSS) ratios. Only operational incomes (interest, fees and investment incomes) are included in the computation of OSS and FSS.
From the above table, GSLS will become viable by within the 3rd year (9th quarter) when the Operational Self-Sufficiency (OSS) ratio hit 111%. GSLS will attain full financial viability by the 6th year (there is a big delay in attaining 100% FSS because of the high inflation costs involved we assumed annual inflation rate at 15%) "% 6 6 ( 0 B - ( = +/H ( . 6 - 6 = 6 //H= +/H 6 - 6 C ; F5 /H - 6 . . ; - ' . G & /H ( . & //H ( - 7' 8 C . ; -
Page 73
-----------------------------------------------
Num ber of savers and borrowers

10,000 8,000 6,000 Number 4,000 2,000 0 1 3 5 7 9 11 13 15 17 19 Quarters
Operating incomes of two branches

200,000 Kina 100,000 0 -100,000 1 3 5 7 9 11 13 15 17 19
Quarters
9.2 Key assumptions used in the financial projections

The financial model used a number of key assumptions that included the following:
Table 19 - Assumptions used in the financial model

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; -
= :
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----------------------------------------------. 93$' : 9 2 = - . :
The financial modeling spreadsheet runs on Microsoft Excel and is included in the final submission of this report. It can also be downloaded anytime from the private website of the consultant - http://www.devjobsmail.com/cpa/png/model.ZIP
9.3 Financial requirements (core microfinance only)

The core microfinance programme, as described here, will require equity funding of around 2,073,700 kina (around 829,480 Australian dollars56). The details are shown in Table 20 below. This amount is for the main or core microfinance activity, and does not include the cost of technical assistance required to get it going and the costs for doing the baseline and impact studies. The financial support from the donor is needed only during the first three years, though it is 4-year programme.
Table 20 - Financial resources needed for core microfinance 1 2 3 4

6 : # 6 : = * B B C = = 9 2 = 1 . . = //=/// !//=/// ',)- ,-)) The need for adequate capital The programme needs adequate equity (computed at 2.073 million kina) to allow efficient operation, to absorb the initial operating losses, to handle temporary liquidity problems and to build up a loan and investment portfolio. Below is an explanation on its uses: & . . . F &* F1 - : B : ; G7 6 B G F . . : - . 9 2 : : . = ; . 7 6 1 = G= = 8 ; ; 3 "9 : - % 8 . = = . : 9 2 &*() '+( = = 2 = 1 = ! /= // ' () 6 = ! =/// '(
" C 8
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7<! /= //8 : '+H : . :
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Page 76
----------------------------------------------%/=/// ; 1 1 9 2 : 1 - . C :
This equity infusion will be funded almost entirely from donations made AusAID (if it agrees) and such donated capital will be booked as equity in the books of the GSLS.57
9.4 Projected incomes and expenses for 5 years

Table 21 below shows the consolidated projected (pro-forma) income statements for GSLS for five years of operations.
Table 21 - Projected incomes and expenses for 5 years

REVENUES
Revenues -First Branch Interest incomes Fee-based incomes Investment incomes Revenues-Second Branch Interest incomes Fee-based incomes Investment incomes
year 1
179,024 12,334 49,740 116,950 54,360 2,579 15,755 36,025 233,384
year 2
337,034 77,703 99,556 159,775 199,014 38,095 68,244 92,675 536,048
year 3
540,618 196,740 138,703 205,175 385,790 141,738 109,727 134,325 926,408
year 4
715,749 265,604 161,770 288,375 583,719 248,494 138,925 196,300 1,299,468
year 5
857,244 243,244 200,700 413,300 737,918 261,431 169,162 307,325 1,595,162
Totals
2,629,669 795,625 650,469 1,183,575 1,960,801 692,337 501,814 766,650 4,590,470
%
57% 17% 14% 26% 43% 15% 11% 17% 100%
Total revenues
EXPENSES
Expenses of First Branch Salaries and fringe benefits Interest expense Admin & operating expenses Training Expenses Depreciation Bad Debt Losses Expenses of Second Branch Salaries and fringe benefits Interest expense Admin & operating expenses Training Expenses Depreciation Bad Debt Losses 341,296 216,478 7,827 62,680 11,250 41,477 1,585 109,588 62,109 1,218 25,840 5,125 15,194 103 450,884 (217,500) 416,894 246,083 31,080 72,082 11,250 41,477 14,922 260,737 146,722 13,848 53,556 10,250 30,387 5,973 677,630 (141,583) 523,180 282,996 70,360 82,549 0 41,477 45,798 335,905 168,731 41,518 61,244 5,125 30,387 28,901 859,085 67,323 661,731 336,178 119,677 94,587 0 41,477 69,812 437,013 194,040 81,350 70,086 0 30,387 61,150 1,098,744 200,724 786,683 386,604 172,655 108,430 0 41,477 77,517 536,882 223,147 127,878 80,254 0 30,387 75,216 1,323,564 271,598 2,729,783 1,468,339 401,599 420,328 22,500 207,385 209,633 1,680,125 794,749 265,811 290,980 20,500 136,742 171,343 4,409,908 180,562 62% 33% 9% 10% 1% 5% 5% 38% 18% 6% 7% 0% 3% 4% 100%
Total expenses
+%
9 2
Page 77
-----------------------------------------------
Figure 2 - A Operating income of GSLS
Operating incom e (deficits)

100,000 50,000 kina 0 (50,000) (100,000) quarters
Figure 2 - B Cumulative operating deficits
9 11 13 15 17 19
Cum ulative operating deficits

400,000 200,000 kina 0 (200,000) (400,000) quarters 1 3 5 7 9 11 13 15 17 19
Figure 2-A above shows that during the first 8 quarters, there shall be significant net losses (also called as operating deficits) because revenues on those quarters are not enough to cover expenses. The trend will change sometime by the 9th and 10th quarters when incomes will equal expenses; hence reaching a break-even point. Beginning 11th quarter, GSLS will start realizing profits or net incomes, which will gradually recover or recoup the accumulated deficits of the first 8 quarters. At the end of five years, all of the accumulated deficits will have been wiped out completely, as shown by Figure 2-B. Page 78
-----------------------------------------------
9.5 Projected balance sheets for 5 years

The projected (pro-forma) balance sheets for each of the five years are shown in the table below.
Table 22 - Projected balance sheets

year 1 year 2 year 3 year 4 year 5
ASSETS
Current assets
Cash in bank, at hand and in-transit Investment in T-bills Loan portfolio - reg loans Loan portfolio - enterp loans 146,835 1,400,000 76,945 10,387 87,332 430,682 56,670 374,012 2,008,179 313,840 1,900,000 424,003 83,816 507,819 430,682 128,534 302,148 3,023,807 401,530 2,700,000 1,094,752 199,781 1,294,533 430,682 200,398 230,284 4,626,347 789,209 3,850,000 1,531,579 325,116 1,856,696 430,682 272,262 158,420 6,654,324 634,718 5,850,000 1,880,217 406,480 2,286,697 430,682 344,126 86,556 8,857,971
Total Loan Portfolio Fixed assets

Leasehold improvmts, vehicles, eqpt Less accum depreciation
Net fixed assets

TOTAL ASSETS
LIABILITIES AND EQUITY

Savings Deposits of Members58 CBU savings accounts Budget savings accounts School fee savings accounts Total liabilities Quasi-equity (held by GBDFI) Equity owned by GBDFI Donated Equity placed by donor Total Equity Operating Income / Losses Net equity TOTAL LIABILITIES AND EQUITY 161,547 31,904 226,528 419,979 356,140 25,000 1,424,560 1,805,700 (217,500) 1,588,200 2,008,179 780,134 98,320 523,735 1,402,190 391,140 25,000 1,564,560 1,980,700 (359,083) 1,621,617 3,023,807 1,912,901 171,751 812,755 2,897,407 399,140 25,000 1,596,560 2,020,700 (291,760) 1,728,940 4,626,347 3,299,026 225,020 1,200,614 4,724,661 399,140 25,000 1,596,560 2,020,700 (91,036) 1,929,664 6,654,324 4,798,986 358,470 1,499,253 6,656,709 399,140 25,000 1,596,560 2,020,700 180,562 2,201,262 8,857,971
You will observe that the savings deposits of members will increase every year; expected to reach 6.6 million kina59 by the end of 5th year, when savings will constitute around 75% of total assets of GSLS; see analysis below.
> : > ; *
=-
. .
: C : = : : - - : 6 & 7 8C 6 .
59
: /
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// ;
- - : - "#$ %/H= - :
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. 4
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----------------------------------------------You would notice also in the balance sheet that investments will increase faster than loan portfolio, precisely because of the assumption that loan uptake will not be as fast as savings uptake; hence the difference is placed in safe investments to generate income.60 Over the 5 year period, the proportion funded by equity decreases while that of savings increases rapidly. By the end of 5th year, the proportion of savings to total assets will reach 75%, while the proportion of equity to total assets will be around 25% which we feel is the maximum extent of leveraging capital; this is similar to the capital adequacy ratio (CAR) used by banks. The CAR should not be allowed to go beyond 25% because there are real risks of over-leveraging. (A 25% capital adequacy ratio means that each kina of equity is leveraged 3 times, generating 3 kina in savings. Given the market in PNG, this is what we feel is the maximum degree of leveraging for a microfinance organization given the volatility of loan portfolio of MFIs compared with commercial banks, which can leverage up to 10 times their equity.) Booking of equity in the books: There is an item in the balance sheet labeled quasiequity owned by GBDF amounting to 399,140 kina. This would be the result of an assumption made that 80% of donated capital provided by the donor will be booked as donated capital in the books of GSLS, which means it is owned by the thousands of membershareholders of the GSLS, while 20% will be booked as long-term loans from GBDF, which is quasi-equity (or subordinated debt) in the balance sheet of GSLS. The purpose of this assumption is to allow GBDF to earn some dividends from the operations of GSLS in the future, and such dividend earnings may be used by GBDF to support its own training activities or core operations.61 This assumption in the financial model can be changed at anytime based on the actual agreement between the donor and GBDF.
9.6 Potential to become a bank

If by the end of 4th or 5th year and the SLS wants to generate more savings, probably due to more demand from the people or due to members demand to have more sophisticated set financial products, or if has gained substantial reserves62, then it should seriously consider converting the SLS to a licensed financial institution (LFI) and further increase its capital base. That is like the SLS becoming a bank; a bank owned by low income people of NCD. The required minimum capital for an LFI registration is 1.5 million kina. By the end of third year, it is expected that the capital base of GSLS will reach 1.7 million kina, which will be sufficient to meet the minimum capitalization for an LFI. GSLS can also sell shares of stocks to its own members, which by then would have reached 8,000 people. The SLS shall simply
)/
; 8. = : . :
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----------------------------------------------ask each member to buy shares of stocks in the new LFI. 63 It can also invite external private investors, to put in equity capital to the new LFI. As stated earlier, it would be fairly easy to convert the SLS to a licensed financial institution (LFI) because the law vests the central bank governor with power to direct a SLS to convert to a LFI, if feasible and when needed. For example, the ENBSLS is now negotiating with the central bank to convert the SLS to a licensed financial institution, which is termed a micro-bank; it is likely that the central bank will allow it to convert into a micro-bank within the near future which will give it more flexibility in terms of setting their prices on loans.
Figure 3 Members savings deposits will increase over time
Savings collected from members

8,000,000 6,000,000 Kina 4,000,000 2,000,000 0 1 3 5 7 9 11 13 15 17 19 Quarters
9.7 Financial requirements (over-all)

Table 23 below contains an estimation of the total financial requirements; total requirement is computed at K 5,977,224 or 1,561,410 Australian dollars.
Table 23 - Total financial requirements

kina kina kina
Kina
AusDollar
+ 6 = = 2
= : =
! =///
! =///
B 6 =
2 : -
1 %/ ;
= : -
: 2'B !//=/// ;
=///
= :-
Page 81
----------------------------------------------' # * B . * B 1 +,.- ,-)) 0 1 & =. . . =. = - 6 & . "9 = =!/! = ! +!= + &) , 1 2 . / 3 B = / 1,))) 3 0 / %=/// +1,))) '),))) 1,/--,''* .,))) +,1&+,*+) = ! %=/// / ')),))) =!/! = ! +!= &) ,'*/ = +! = ! +!= &) ,' / +,.)/,.'* -' ,/ ) ',)- ,-)) .'/,*.) 9 2 = //=/// //=/// !//=/// = = //=/// / / = //=/// 6 1 . C = : = = ! /= // / / ! /= //
The total financial requirement is K5,977,224 or 1,561,410 Australian dollars, more or less.
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-----------------------------------------------
/ 0
Managing and controlling delinquency and defaults Managing risks related to fraud and fund misuse Managing risks related to theft and robbery
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Chapter 10 Risk-management
There are three major risks facing the programme a) loan delinquency, b) fraud and funds misuse and c) theft and robbery. This chapter discusses briefly some of the detailed tactics, techniques and mechanisms that maybe used to control or mitigate such risks.
10.1 Delinquency management system

As discussed above, the main challenge facing the microfinance sector is loan delinquency (payments in arrears) and loan default (non-repayment of loans, principal plus interest). We have already set the premise that people generally do not pay back loans extended by microfinance programmes because they do not understand fully that the loan must be paid back, and with interest, and paid in a timely manner. They have been used to the loans given by their relatives and wantoks which are not repaid at all. They consider loans from microfinance institutions as free money similar to wantok loans. Delinquency is also high even in a SLS setup; for example, the ENBSLS reports that 13% of its loans are delinquent, meaning the loan installments are not paid on time, but the ENBSLS do not suffer severely because they offset the unpaid loans with the members savings. Their loan losses are marginal, less than 1% of portfolio. To mitigate this big risk of loan defaults, we recommend a number of specific measures. Let us discuss first the three main defense lines, as follows: 8 ' . . 8 5 7+/H8 = - . . "9 2 = . ' 6 - . : * . - : - - 0 . = - , " :3 . - 0 ; - . . F . . - - = = -
: ; 2 . B - :-
= :
- . H ; =-
: 8 & 9 2
: ; B =9 2 : - =9 2 . =9 2 ; - . :
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64
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Page 84
----------------------------------------------- # . = 5 : 5 C;
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? -
F & = #
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Besides the three major defense lines against delinquency described above, we recommend that GSLS employ a number of proven best practices to maintain high repayment, as follows: 8 6 B = - '( - ' F . = . =. - . . :- - ( : - 6 & 1 G = 2 = :- ' ( : = - 3 - : - ; -
8 9 . = # * 8 . - '( . 6 8 0 : . - . : * . ' ,6 . -
= :; = F
9 G -
= : * = - - : //H 9 2 ; -
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Page 85
-----------------------------------------------
8 9 2 B : 6 = .
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= . = - A: ; 1 = . . : - -
; = = -
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Systematic tracking of clients behavior: GSLS should prepare a database of all members household and savings-borrowing behavior; stored in the computer and have it updated them frequently. The first set of data
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----------------------------------------------should come in when they join the SLS and fill up the Membership Application Form.66 Each member should be given a unique members ID number, which should correspond if possible to her account number. The members can be searched by their savings group ID number, their settlement, location, etc. Every time a member borrows money, or make full repayment of a loan, or open a new savings account, or request for a new ID, or close any account, then that members file in the database should be updated. Any member who has missed her loan installments for at least 30 days should be marked as delinquent in the database. Every year, at least 15% of the members files should be updated, by picking a random sample then asking the selected persons to fill up a Members Updated Information Sheet.
10.2 Managing risks related fraud and funds misuse

The SLS sector suffered serious problems in mid-1970s up to 1990s, when many SLS had irregularities and abuses, like fund mismanagement, lack of accounting and internal controls, inappropriate lending policies, abuse of authority and misuse of funds. Out of the 165 SLS, only 21 are active today, and more than 100 SLS have collapsed due to abuse and misuse of funds. A key informant (ex-banker) mentioned that in a PNG bank with which he was formerly associated, around 10% of staff was fired each year due to fraud, defalcations and abuse. These show that fraudulent practices are common. Fortunately, there are proven techniques to control this kind of risk. Internal controls Ginigoada should put in place a number of strong internal controls within the SLS, and below are some examples and suggestions: B # . ( % 1 1 :. : 9 2 = - '( # = :- - . : - '(A# = :- : . - - ( . '( A # - ' . ( 7 8 - .
9 2
; -
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66
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Page 87
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Page 88
-----------------------------------------------
The financial system within GSLS should leave paper trails so that the auditor can trace back the source of errors or fraud. Examples are: deposit slips, withdrawal slips, ORs, TRs, vouchers, etc. GSLS should have systems and procedures that detect irregularities quickly to prevent or deter fraud by employees or clients. For example, the Branch Manager should watch out always for any sudden rise of absenteeism or tardiness from employees, which can be a sign of some irregularity. The head office should also carefully screen the new employees, checking their background, making sure that he has no prior involvement in fraudulent activities. In short, GSLS should make judicious use of audits, strict rules, internal controls and stern discipline to prevent fraud and corruption. It should send a strong signal to all employees that it will not tolerate fraud and irregularities. Internal audit: GSLS should have an Internal Auditor who shall perform both scheduled (regular) audits as well as on-the-spot (unannounced) audits of the branches. She should be a member of the Supervisory Committee (SC) whose role is conducting internal audits. Her role is to check and ensure that all internal controls are maintained, all policies are being properly implemented, and that there are no irregularities or fraudulent activities. She shall conduct periodic internal audits, either doing it alone or working closely with the other SC members. Furthermore: - B . - B - . - ; & - . A - 3 = = . & . : . = #- ; -
= : 1 . : 1 1 % - ; ; B
: - . :- - -
- ; :- - 2 :-
; 7
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= 8
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External audits: Besides these, GSLS should also engage a qualified External Auditor. The GBDF board may appoint the External Auditor, in consultation with BPNG. The external audit may be held at least once a year. We further recommend three additional measures to deter fraud 8 $ - = Page 89 - 9 - $ 9 - ; - : -
----------------------------------------------8 : ; - A9 2 . . ; = * : 1 %/ ; = B = > :- : - 9 2 : ; // ; 1 7 -8 :
:- : - & = - = . -= =/// ; 9 2 1 '( = - - . = : ; = - 1 - . = #3D .
8 4 : , : 9 2 9 2 = . 9
9 2
: 9 2 =
. : : :
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; :
10.3 Managing risks related to theft and robbery

Given the serious law-and-order situation in NCD, GSLS should take special measures to mitigate the risks of theft and robbery. Here are some suggestions: Minimizing the risk of the branch or head office being robbed During the pre-operation phase, the MTA should assess the security issues of GSLS, in consultation with security experts, police officials, security agencies, and people who are familiar with crime situation in POM. The MTA should also consider options like having escorts from the village-level community police, to protect GSLS people who are collecting the cash collections. Some features of the security system may include the following; : & -( 9 2 : 1 = ; = B = ; -. ; :- 1 -= : ; ; - . : : . 9 2 : = : &. = '( ; = . ; . 3 = : - ) = . : ; B
= -
9 2 1 1 . . = -
Minimizing the risk of field staff being attacked

)
B -
=9 2
: -
Page 90
----------------------------------------------
3 . G= $ 4 4 9 -
F 3 '(
: ; . = - '( = :- - = - '( :- - : ; - . : ; : ; . = - '( . - F G :- . ; : - - . ; ; B . :- - '( . ; - F G= . F G9 2 :. ; - '( '( ; . G - '( = - - '( 9 2 -
- = - F
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Minimizing the risk of collections being robbed or Field Officers attacked There are real risks that that money collected from savings groups maybe robbed. Ginigoada should not allow its Field Officers to carry cash collections, except in special unavoidable circumstances and approved by the BM. This is to ensure that the FO does not become a target of attack. GSLS should devise a system of cash collection system that utilizes different and varying methods of collecting money from the field. We recommend three methods: Method 1 - Using public transport, two persons from the savings group (maybe the treasurer and another member) shall travel to the Branch Office and bring the collections, or if instructed by the FO, the money may be deposited directly to a nearby bank branch Method 2 - GSLS pickup vehicle shall pick up and collect the money from the house of the treasurer of the savings group;68 Method 3 - Using the pickup vehicle, GSLS shall pick up the treasurer or chairman of the group who shall bring the money herself to the bank or to the branch office.
The Branch Manager, with guidance from the head office, shall develop a weekly collection plan which should be kept in secret. The plan describes the different methods that will be used in collecting the cash from the different savings groups in various settlements and villages. The important point here is not to stick to a pattern. The collection scheme used should be deliberately made to be unpredictable and GSLS should not establish a pattern.
)
: ; -
. -
; . -
: -
. . &
: 1
. ;
Page 91
----------------------------------------------The manner of collection from a single savings group should vary every week, or from time to time, to prevent rascals or robbers from figuring out the exact manner or date/time by which money will be collected. This will make robbery attempts more difficult. Lastly, Ginigoada should assess its security system periodically and try out a number of new techniques to deter crime, and improve its security system, because there are loopholes and weaknesses in every system. It should consult a security expert to review its security mechanisms, at least once a year, and make improvements whenever necessary.69
69
9 2
F .
,6
"#$ :-
: -
:- -
Page 92
-----------------------------------------------
!
This chapter describes Basic financial management policies Management information system: computerized accounting Financial reporting Cash-flow management Strict expense control Loan loss provisioning policy Loan write off policy Loan processing procedure
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Chapter 11 MIS and financial management

The Ginigoada, as a financial institution, should install a top-notch MIS and financial management system. GSLS should also adopt a number of important prudential practices.
11.1 Basic financial management policies

GSLS should adopt basic accounting policies that are reasonable and conforms to standard practices within the microfinance sector and with the accepted accounting standards of PNG. Some examples or suggestions are shown below: B * ; . B : = 6 = 6 - 6 ; . & 0 ; 1 . - .
11.2 - Financial reporting

GSLS should install a strong MIS system that allows it to regularly prepare financial reports. The following should be produced at its head office and branches: Balance sheet, produced monthly, quarterly and year-end Income Statement, produced monthly, quarterly and year-end Portfolio report (loan-aging), produced daily, monthly, quarterly and year-end, Daily Cash Receipts, Cash Disbursements, produced at the branches, every day The MIS should preferably be residing in 2 or 3 computers, which should be connected through a local area network (LAN). It should have proper backup systems, remote administrator programmes, antivirus software, and communication features so it could send and receive reports easily. Staff should be trained properly in operating the MIS and only authorized personnel should be allowed access the data through the use of password protections. The staff will be trained on backup procedures, and backups will be required to be done periodically to protect the integrity of the database. Backups will use a Compact Disc Writer and made to re-writeable Compact Disks, which serves as back-up storage of data. With this, data loss can be avoided. The branch offices should send daily financial reports to the head office, through LAN or hyper terminal connection using phone lines. The FACTS computerized accounting system is currently available at the FESALOS office, at a relatively cheap price. We were informed that FACTS has many of these basic features described above, but we were not able to confirm this. It will be necessary for the MTA to thoroughly examine the FACTS software; and if there are some limitations, such should be remedied either by ordering additional programming work from the Australian vendor, or if
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----------------------------------------------that would be too prohibitive, secure a new accounting software.70 Another option is to create complementary software that will run along FACTS; that will carry the load of processing other information needs of the programme.
11.3 - Cash-flow management

Using the MIS system, GSLS head office should monitor on a daily basis the amount of cash in the two branches. The organization must define a specific and clear formula for computing the amount of reasonable amount of cash that a branch office may keep in its vault. Primary considerations are the volume of cash withdrawals from members and the expected loan disbursals to be made during the week. The head office should strictly enforce a policy that a branch office should not have excessive amounts of cash in its vault. When the threshold amount has been reached, the branch should be required to deposit the excess to the bank. The head office should also monitor the usage of funds, and the rate by which cash is needed, especially for loan disbursals. Any excess cash in the operating or checking account should be invested in short-term, interest-bearing time deposits with commercial banks.
11.4 Very strict expense control

GSLS should keep a strong lid on costs; it should keep costs down; because any significant increase of costs will push viability or will mean not becoming viable. For expense control, the organization should have an Annual Budget that is broken down to the branch level. A budget variance analysis report should be prepared each month, to see the variances of actual versus planned. The Branch Manager should be held accountable if there are serious or major variances in his branchs expenses. Likewise, the GM should be held accountable if there are serious variances in the overall actual expenses versus budgeted. Any change in the budget, especially upward adjustments, should be approved by the BOD.
11.5 - Loan loss provisioning policy

The organization must adopt an aggressive loan loss provisioning policy that makes allowances or provisions for probable loan losses or bad debts. They are usually predictable based on the delinquency condition. For example, a loan which has not been paid for 10 or 12 months is likely to become a bad debt unlike a loan where the member missed two weekly payments only. Loan loss provisioning for financial institutions is very important because the organization must report the true value of its financial assets. For example, it is not honest or ethical for an organization to report that it has 1 million kina in loan portfolio when in reality more than 50% of those loans have not been paid for the past five years. Its loan portfolio is probably worth 50% or less of its stated value, or probably all the loans are worthless by now.
1 - 3 "9
- '&# - : -
= -
: :
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----------------------------------------------Table 24 below shows a suggested loan loss provisioning policy for GSLS, but this must first be consulted with the Registrar and/or with FESALOS before adoption.
Table 24 - Loan loss provisioning policy

Loan categories
Loans with 1-30 days past due payment Loans with 31-60 days past due payment Loans with 61-90 days past due payment Loans with 91-120 days past due payment Loans with 121-180 days past due payment Loans with 181-364 days past due payment Loans with 365 -over days past due
Loan loss provision

0 5% 10 % 30 % 50 % 75 % 100 %
The loan loss provisioning policy should be aggressive because the loan portfolio of microfinance organizations is generally more volatile compared to that of commercial banks. Most micro-loans are unsecured; hence the probability of loss is relatively higher.
11.6 - Loan write-off policy

The loan write-off policy should also be put in place. This is to ensure that GSLS does not carry too much dead woods. Loans that are worthless should be stricken off the books. Usually, verification should be made first before writing off a loan. It must be confirmed that all reasonable efforts have been exerted to collect on the loan but have failed, before concluding that the loan is really worthless. Not writing off bad loans will create an unnecessary drag on the institution. The loan portfolio will carry a heavy burden of old bad loans, which degrades its over-all appearance. The portfolio quality indicators will show below-par performance. Again, the Registrar and/or FESALOS should be consulted on this matter by GSLS before adopting one.
11.7 - Loan processing procedure

Below is a brief description of the loan processing procedure. - '( :1 5 :- // . . : = :- - : B9& B B * = B 8 B . . =
; 8= %// ;
= : = - :. = . * ; : = - 3 = ; - - $ - ; 1 - 3 . : 8 - 3 -
- . 7 - '( - . // ; = - '( . - : - 3 -( . : = . : . . - . C - ; 7 - - 3 -( - - ; -7 . : Page 96
B E -
%// *
----------------------------------------------; :- = 1 . - ;7 -8 * 8 - 3 -( $ $ 9 - #3D : - : ; - . 8 & :B . * =%// ; = ; - - = . 7 ; 7 = -
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-----------------------------------------------
This chapter describes Primary focus: reaching full financial sustainability Sensitivity analysis: the various what if questions Conclusions derived from sensitivity analyses
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Chapter 12 Sustainability and sensitivity analyses

12.1 - Primary focus: reaching full financial sustainability
GSLS board should maintain a clear and steady focus on attaining full financial viability. The financial model says the two branches can become viable in three years time. To measure financial viability, three standard indicators should be used: (a) Operational Self-Sufficiency or OSS, (b) Financial Self-Sufficiency or FSS, and (c) Return of Equity (ROE). The two terms (OSS and FSS) have been explained earlier. The ROE measures the percentage return to the equity capital invested into the organization. It is exactly similar to what businesses use. Time frame to reach 100% viability: Based on the financial model, GSLS branch #1 will become viable near the end of 14th quarter while branch #2 will become viable on the 10th quarter. All in all, if taken together, GSLS should become viable and fully covering its costs, except inflation, by the 12th quarter (or by the end of three years of operation). On the 12th quarter, the Operational Self-Sufficiency (OSS) ratio hit 111%. GSLS will attain full financial viability by the 6th year when its Financial Self-Sufficiency (FSS) ratio hit 100%. Setting and meeting targets: As part of managing and guiding its operations, GSLS board and management should set and meet client outreach and loan portfolio targets and others that are included in the key performance indicators. Management should consult the staff also when setting targets because what may appear easy to achieve on paper is actually difficult to achieve in the field. The targets should be adjusted from time to time to account for specific difficulties or obstacles faced on the ground.
12.2 Sensitivity analysis: the various what if questions

We conducted some sensitivity analyses to determine what would be the outcomes if certain decisions are made or if certain events happened. Here are some of the results: What if the donor does not provide the full amount of required seed money? If the initial seed money is reduced to K300,000 at the beginning, break-even point will be reached by the 15th quarter, but losses will be so staggering, amounting to 612,000 kina by the 5th year, which will likely bring down the GSLS. The reason is that this programme relies heavily on investment income, and without adequate seed money those investment income can not be realized. The cash balances will be too little, which could spark liquidity problems and bank runs.71 It is not prudent to start this programme without an adequate seed capital at the beginning.
& 9 2 ; 9 2 9 2 :: : . . 1 & & ; : ; 9 2 :-
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What if the T-bill interest rate goes up to 18% per annum? Or if it goes down to let us say 9% or even to 7% per annum? Will it affect viability of Ginigoada? The financial model assumes a 15% inflation rate and our sensitivity analysis shows that this programme will work if the investment return on T-bills and other investments is 15% pa or higher. If returns on T-bills or safe investments in PNG drop to 9% per annum, then GSLS would reach break-even point by the 14th quarter, but accumulated deficits will be staggering at K595,600 at the end of fifth year. If T-bill rate is assumed at 7% pa, then the programme will not become viable and will crash by the 4th or 5th year. If on the other hand, the return on investments goes up to 18%, then viability point is attained in the 11th quarter, with healthy profits. This analysis shows that the programme will be very sensitive to investment returns because it will be major source of revenue. The return on investments should be kept always at 14% - 15% or higher. What if the actual loan losses were higher than the ones projected? If lower? We assumed that loan losses will be like this: (a) 2.5% of all regular loans disbursed in each quarter will not be eventually repaid back and will become bad debts; (b) 3.5% for all enterprise loans. These are conservative assumptions and this may not happen given that most loans are secured by savings. However, if the loan losses turn out really bad; higher than these assumptions, say to 7%, break-even point will be reached by the 19th quarter but the accumulated deficits or losses will be staggering at K442,000. The longer time it takes to become viable, and the bigger the accummulated losses, the more likely is the programme to fail. If quarterly loan losses were at 9%, the programme will crash by the 4th year. If quarterly loan losses were at 4%, viability will be reached by the 12th quarter and accumulated losses will be small. This analysis shows that the programme will be quite sensitive to loan losses; even a small percentage increase will mean large impacts on viability. What if loan uptake is slower than projected? We took a very conservative assumption on loan uptake considering that this is a savings-based programme; it takes longer for people to take up loans due to the fact that they have to build up their savings balances first. If there is an even slower loan uptake than projected, at its worst, viability point will be pushed back by at least 2 quarters which is not good, but not fatal. What if annual inflation becomes higher than 15%, say it increased to 20% annually? Or it dive lower to 10% annually. We assumed that inflation rate every year is 15%, which is used to calculate the upward adjustments on salaries, benefits, fuel, rent, supplies and other operating costs. Any increase in the inflation rate means more expenses for GSLS. If the inflation rate turns out higher than 15%, say it becomes 20% annually, then viability point will be pushed back by around two quarters, and there will be some accumulated deficits left by the 5th year. The operating deficits will be higher but would not be fatal. On the hand if inflation turns out lower, say to 10% annually, then Page 100
----------------------------------------------programme will reach break-even point by 9th quarter, and there will be healthy profits. The sensitivity analyses above yield the following conclusions: 1. The initial seed money is important to assure adequate equity capital for the GSLS; for ensuring stability of the branches in terms of liquidity and to generate a reasonable amount of investment income. A bank run is possible if savers lose confidence especially if GSLS is always out of cash. It is not prudent to start this programme without an adequate seed capital at the beginning. 2. Slower loan uptake will mean a big impact on GSLS because revenues can not increase fast enough to cover costs, but would not be fatal.
3. Increases in inflation rate will also impact strongly because operating costs will go up but it will not be fatal. 4. The returns on investments will have a very strong impact on GSLS because it will rely to a large extent on investment income. An investment return ranging from 14% to 16% will be just fine, but when it dips to 7%, then GSLS will not reach viability and will crash. 5. By far, the amount of loan losses suffered each quarter will have the biggest and strongest impact on GSLS. A 7% or 8% quarterly loss is fatal and will surely mean failure of GSLS. A loan loss of 4% quarterly is still tolerable but with negative impacts on profitability. Therefore, it is imperative that loan defaults should be carefully managed, monitored and controlled. Loan losses should be kept below 3% at all times. 6. The longer time it takes to become viable, and the bigger the accummulated losses, the more likely is the programme to fail. These sensitive analyses highlight the risks that the programme faces. Given the poor credit culture in PNG and given the extreme sensitivity of the programme to loan losses, the programme must take a very conservative approach to credit extension, aiming to protect itself against any undue exposure to credit risks; hence our recommendation to take strong multiple defenses against loan delinquency and defaults. It must also invest the funds wisely so that it gets the best possible return on investment.
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" 1
Management staffing of the GSLS Staff hiring and training Compensation policies Code of conduct for employees Staff appraisals and staff incentive system
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Chapter 13 Human resource management

GSLS board should develop objective policies on staff hiring, staff development, and human resource management to attract and keep high quality talented staff. It must also define key values of the organization that emphasizes on integrity. Develop and nurture a set of highly dedicated, professional and hardworking staff. Emphasize incentives for excellent performance, and install severe penalties for fraud, corruption or irregularities. Install a performance monitoring and performance-based incentive mechanism.
13.1 Management staff

GSLS should develop a cadre of professional management staff during the sponsorship period, which will assure long-term continuity of the SLS. The Microfinance Technical Advisor will be tasked with training the managers of GSLS, which consists of three local people the Deputy General Manager, and the two branch managers. Over a 36-month period, the MTA shall teach, train, coach and guide these three managers. The MTA has a special mission of transferring knowledge and skills to the Deputy General Manager (DGM) because he will take over the role of the General Manager when he leaves. In terms of long-term continuity of the SLS, the DGM has a big role to play. Ginigoada should choose the best person available for this DGM appointment. The MTA shall be required by the BOD to prepare a plan for training the managers, to execute the plan, and to submit quarterly confidential reports to the BOD and Ginigoada that contains his assessment of the progress of the three managers. In this way, the board can monitor the extent of skill development of the managers.
13.2 Staff hiring and training

Staff hiring: Ginigoada should implement a rigorous and detailed pre-employment training, six-month on-the-job training, and continuous staff development programme for local staff.72 GSLS should implement an appropriate staff selection process, which will ensure the selection of the best possible candidates for the positions of Field Officers and Branch Managers. We recommend the following process, described in Box 4 below, in staff hiring, especially for the positions of Field Officers. This kind of hiring process will allow Ginigoada to screen out the unfit ones, identify the ones with the right attitude, skills and determination, and ground the new employees in the basics of microfinance.
72
. A . =
; . C
- : . .
. :
: ; 6 6
; C 1 ; : C
. = C -
= 2
; = . .
- -
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-----------------------------------------------
Box 4 Suggested staff recruitment process

& . : - $ =9 2 : - = 9 C ' ; : ; ' : ; 7 8 ; = 0 5 - ; ; #? 1 . : - =: - = :- :; . : : : ; 3 : C := - ; . = = :- - : : 6 - : 6 B : :6 : ; $ F ; B . :G : : ; = :- 5 = . . - 5 7D "98 : : ; : =: - : - - - . - : = 6 = : - 9 : -
( . :
- ; C 3 ; . : :- : ; 6 4 =9 2 - = :- - :- = = = . 6 - 5 :
7 8 #
= N ' ( - # 7 8
9 2 = ' (
= = . . :
7 8 - = ! - : -
= -
: -
. :
7 8 - = ; $ 9 2
- : ; 7% 8 ' ( . ' 0 8 ( #
6 - : ;E . # 8, ( 7 . # : -
. : . = 0
; : -
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- .
& 3
Page 104
B =
---------------------------------------------- ,6 7 8 1 9 2 3 - 3 - $ 9 2 . - F C - -1 . 3 = = :. 7 F1 : G 6 * 1 : - //H - -1 8 C B : ; 9 . G . C & F - ( - 5 = : ; = * . =$ ,. C- : & G 3 & = 2 . 7# ? 9 2 , = 9 2 =# 8 . := = 6 6 # 2 $ , = =
. := - C 6 . : 5 : 0 & . :' ( -
= :- - :
4 : 4 : . 4 : . 3 # , $ 1 - . 4 :
13.3 Compensation policies

Basic salaries: We recommend that Ginigoada establish a salary scale which shall apply for all employees who will be employed and engaged in the Ginigoada microfinance programme. The salary scale should be so designed that it is competitive, attractive to prospective employees and able to keep employees from leaving the programme; but it should not be set too high which could make operations of Ginigoada expensive. It should strike the right balance. The personnel cost is the biggest expense item in the income statement hence Ginigoada should carefully watch this cost item. Even a small percentage increase in salaries will translate to large losses. Table 25 below shows an indicative salary scale.
Table 25 - Suggested salary scale (monthly)

Level
1 1 2 3 4 5
Position
Cleaners Security Guards Clerks Data Processor Field Officer Senior Field Officer
Lower range
180 250 350 700 700 900
Upper range
350 450 500 1,400 1,600 1,900
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----------------------------------------------6 7 8 Branch Manager Deputy General Manager General Manager 1,200 1,800 2,000 2,400 2,800 3,500
When the 2nd branch is established, GSLS would have a total of 26 personnel as listed in Table 26 below. The salaries are also shown, which is the amount of monthly salary that each staff will receive each month. By the fourth year, it will be reduced by one when the expatriate GM leaves.
Table 26 - Monthly salary of staff

FIRST BRANCH
1 2 3 4 5 6 7 8 9 10 11 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5
monthly salary
1,500 750 750 900 900 900 900 900 500 240 240
Branch Manager - b1 Data Processor Teller Field Officer 1 Field Officer 2 Field Officer 3 Field Officer 4 Field Officer 5 Driver / maintenance
Guard 1 Guard 2
SECOND BRANCH
Branch Manager - b2 Data Processor Teller Field Officer 1 Field Officer 2 Field Officer 3 Field Officer 4 Driver / maintenance
Guard 1 Guard 2
monthly salary
1,500 750 750 900 900 900 900 500 240 240
HEAD OFFICE
General Manager Deputy Manager Internal Auditor (part-time) Data Processor Driver / maintenance
monthly salary
1,800 500 750 550
We were unable to do a more intensive comparison of salary rates in NCD due to lack of time. The salary costs as mentioned above is indicative only73 and should not be considered final. Ginigoada need to do a more thorough look at the industry salary levels, especially for the salaries of the DGM and the Branch Managers. It may consult PWC, salary surveys of the PNG Banks and Allied Services; deeper analysis is needed to make
>-
. = :-
: - .
&
Page 106
----------------------------------------------sure that the salaries for these three managers are competitive, fair and above all, adequate to meet the high cost of living in a city like Moresby. Fringe benefits: We assumed that Ginigoada will provide various basic fringe benefits to employees of GSLS, like the following (a) (b) (c) (d) (e) (f) annual allowance for uniforms (120 to 180 kina per year) basic health insurance coverage (396 kina per year), coverage under the National Provident Fund (now called as NASFUND);74 Housing Allowance (10% of salary) separation benefits or commonly called as Gratuity Pay; Bonuses - Christmas and incentives (15% of salary).
The detailed assumptions on each item above are found in the financial model spreadsheets. These benefits are also adjusted upwards every year on account of inflation. The package of fringe benefits described above is quite attractive because many small private companies in PNG do not offer as much benefits. The cost of such fringe benefits is 42% of salaries; see Table 27 below for an analysis.75
Table 27 - Analysis of fringe benefits of GSLS employees

1st branch Gross salaries over 5 years Gross fringe benefits over 5 years 1,034,272 434,067 2nd branch 652,123 274,321 Head Office 309,331 131,434 Overall 1,995,726 839,823 % 100.00% 42.08%
The financial model shows that compensation costs (salaries + fringe benefits) will constitute 51% of all expenses of GSLS; hence the BOD should pay a lot of attention in controlling this cost.
13.4 Code of conduct

Ginigoada should make integrity as the cornerstone of its value system. GSLS should communicate to its staff that it will not tolerate any kind of irregularity or unethical behavior. Being a financial institution, not unlike a bank, it will be handling lots of money that belongs to other people. GSLS should demand the highest level of honesty and integrity from its staff. Hence, we recommend that GSLS develop an Employees Code of Conduct. It will specify the right kind of behavior; response and attitudes employees should have or should develop. It will specify how employees will respond to customer needs, to ensure that GSLS becomes a customer-friendly organization. The Code of Conduct should also specify what things or actions are considered offensive, unethical, fraudulent and irregular. It will contain a section of staff discipline where stern measures are taken to reprimand, correct, or punish the offenders. GSLS should have a firm policy of sacking an employee who has willfully committed a fraudulent activity.
! - " "& 'D"$ B
. .
' 9 2 : H
- . "& 'D"$ + / :7-
" -= %H 9 2 8 :-
'
75
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----------------------------------------------Besides the Code of Conduct GSLS board should also define a clear set of human resource management policies, also called as personnel policies. The policies should be as simple, clear and straight forward as possible; and employees should have their own respective copies of the policies in the form of an Employees Handbook. GSLS should ensure that all employees are aware of the standing rules and policies of the organization.
13.5 Staff appraisals and staff incentive system

GSLS must put in place a fair, transparent and objective Staff Appraisal system, which is the main tool to manage performance. This is a system where performance targets are set for each manager or personnel at the beginning of the year; then he/she is appraised at the middle of the year and at the end of the year. This ensures that all employees are working towards the accomplishment of goals. It shall be basis also for giving salary increase for the following year. Tied tightly with the staff appraisal system is the incentive system which aims to encourage excellence and good performance. GSLS should put in place an incentive system that provides rewards for good and excellent performance of employees. The performance indicators for FOs may include the following: (a) client caseload; (b) loan portfolio caseload; and (c) a portfolio quality indicator such as repayment rate or portfolio-at-risk ratio. The support staff (Branch Manager, Data Processor and Teller) should also get some incentives based on the performance of the FOs who they support. GSLS head office should install a performance monitoring system where the key performance indicators mentioned above are collected on monthly basis. Then, the head office will release the bonuses, periodically, upon meeting of the set standards.
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$
This chapter describes Social intermediation is an essential part: to educate clients Non-financial services Business skills training
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Chapter 14 Social intermediation

14.1 Social intermediation is an essential part
The term social intermediation is a technical term used in microfinance to mean all sorts of activities that prepare the clients to engage in financial transactions such counting of money, saving small amounts of money every day, manner of estimating needs for loans, applying for loans, using loans properly, repaying loans, attending weekly group meetings, etc. It also includes basic household budgeting, personal financial discipline, etc. Social intermediation is an essential part of a microfinance programme because if clients are not ready, then how can they partake in the transactions involved. In short, it prepares clients to be ready to handle savings and credit. Social intermediation does not include training on how to start IGAs, how to do simple bookkeeping, or how to manage a small business. These are considered business development services (BDS) and discussed under section 14.2 below In some countries, the clients are not yet ready to engage fully in microfinance transactions because of a number of obstacles, such as illiteracy, lack of confidence, etc. In PNG, the biggest invisible obstacle is that people are not yet fully ready to handle loans due to the fact that they have not yet fully shifted from the old traditional system where wantok loans dominate to the modern cash economy. A key informant familiar with many microfinance organizations in PNG said MFIs are not spending enough time to educate their clients at the early stage. Hence, we recommend that Ginigoada develop a clear plan on how to deliver social intermediation services to the people it is trying to serve. That plan may include the following: 9 9 : ; =- : C - = '( - : . . . Page 110 . = . : . . = - '( =: . = . F3 C 6 , . 9 9 G =- : : . = - - : ; = F3 , = 9 + = = = G : 8 = % - F G . C7- :
---------------------------------------------- 9 . 7- - 1 ; = F ::- ; :- ; G 7#( 8 8
On-going education for members: After the first 12 months of operations, the time spent by members in the group meetings can be used to deliver other developmental messages as well, including information on universal rights of children, rights of women, issues on marriage, how to raise children, preventing common diseases, basic hygiene in the household, basic first-aid tips, preventing assaults, how to prepare inexpensive but nutritious meals, etc.76 These help improve family welfare. This can keep interest in savings groups more productive and educational, because the members get to learn new practical things every week. Make the savings groups more interesting: To avoid monotony, the FO should vary the activities in the group meeting (except the banking tasks). This may mean including some sing-sing (singing of common church hymns), short prayer for the sick and troubled by an invited pastor or a church elder, a short drama by a local youth group, a solo rendition by a village lass, or visits by invited guests, like a doctor, school teacher, or a social worker. This can keep interest in savings groups longer and more established. 77 Let the poorest participate: The poorest can benefit even by listening and participating in savings groups. They can listen or participate in the groups weekly meetings which will allow them to get vital information, referral services, and they can even get sufficient encouragement from their co-members to eventually engage in profitable micro-businesses later on. For those without any IGAs, their continuous participation will enable them to gain the necessary confidence to start their own IGAs or small businesses. Working together: Another form of social intermediation is by encouraging people to become aware of whats happening in the SLS as a whole. Ginigoada shall hold an Annual General Meeting in accordance with Section 24 of the SLS Act; such a meeting will be useful in educating members on the importance of working together and on the workings of the SLS.
Section 24. Annual General Meeting - The first annual general meeting of a society shall be held within one month after the registration of the society under this Act. The annual general meeting of a society shall be held within three months, or such other period as is determined by the Registrar, after the close of the financial year.
If Ginigoada conducts these social intermediation activities, it is actually developing the market base, which is the clientele. If the market base is weak, then Ginigoada would be weak and will likely fail due to non-repayment of loans and collapse of the savings groups. If the market base is strong then the savings groups will be strong, individual households will
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- .
. F : - 4( , > . G :; = := ; :-
F - 9 2 .
G -
- ' -
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----------------------------------------------be stronger and better managed, repayment performance will be good, savings mobilization will be terrific and Ginigoada will therefore succeed.
14.2 Business skills training

Business development services include such things like: training people how to start IGAs, how to do simple bookkeeping, or how to manage a small business. There maybe people who will request GSLS for training on various trade skills carpentry, masonry, welding, etc.; and there may be members in savings groups and people in the community who will request or demand this training assistance from GSLS. We do not recommend that GSLS provide these training services directly because GSLS is designed to be a financial institution not as a training organization. Instead GSLS should tap other resource agencies to do it; and GBDF maybe in a good position to provide these kinds of training services. Annex H provides some basic suggestions to GBDF on this matter. GSLS FOs in the field maybe asked to informally collect information like: a) what kinds of trade and business skills people need; b) who are the people in the village that have expressed need for bookkeeping training or business skills training; c) who in the village can provide apprenticeship training for young people. This information can then be turned over to GBDF for its planning needs. The provision of training should be done by other NGOs or GBDFs trainors, while provision of financial services should be done by GSLS. There should be NO mixing of the two functions. Also, for extending credit, especially to those already running a business, no prior business training will be required.
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% #
The role of the Microfinance Technical Adviser The scope of work of the MTA
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Chapter 15 Technical assistance required

We recommend that the AusAID or ADB select and hire a highly qualified expatriate Microfinance Technical Advisor (MTA); one with at least ten years of actual experience in running and guiding successful microfinance programmes or operations. The MTA will be appointed as the GM of the GSLS; at least for the first 36 months of programme implementation. One of his major responsibilities of is to train the management staff of GSLS. Over a 36-month period, the MTA / GM shall teach, train, coach and guide these three managers. The MTA has a special mission of transferring knowledge and skills to the Deputy General Manager (DGM) because the latter will take over the position of the MTA/GM after three years. The work of the MTA will be organized into four phases: (a) pre-operation phase, (b) foundation phase; (d) stabilization phase; and (e) exit phase; see Table 28 below. We also prepared a more detailed indicative TOR for the MTA; see Annex D.
Table 28 Scope of work for the Microfinance Technical Adviser

Phase Pre-operation phase
(paid time =4 months)
4 ! - 9 2 = & : - 2 C - 3 C 6 C . : - - 3 "9C C A B 3 : ;: F . . - G = C C . . = =
Foundation phase
(paid time=15 months)
- -
$ ' 4 9
Stabilization phase
Exit phase
* 2 - C . $9
2 C = = $9 -
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. 9 =
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----------------------------------------------- $9 M / -
4 $ .
9 C :
M )
We foresee that the Ginigoada will need the direct assistance of the MTA for at least 36 months but the actual number of paid time, or time spent in-country is 30 months only. Thats because he will not be in-country all the time, as there will be some time allotted for home leaves or vacation leaves.78 During the times that the MTA is away from the country, the DGM takes over in running the SLS, which gives him some direct experience in running it. The MTA will ensure that GSLS has all the necessary systems, procedures, methodologies, controls and tools in place. That includes well-trained staff, knowledgeable managers and top-notch MIS. As part of this setting-up process, it would be necessary for the MTA to visit and observe several good SLSs in the country, so that the best practices of those SLS can be adopted to the GSLS; the budget for MTA includes a small budget for such MTA visits. The MTA should also assess the security issues of GSLS, during the pre-operation phase, in consultation with security experts, police officials, security agencies, and people who are familiar with crime situation in POM. The MTA should also consider options like having escorts from the village-level community police, to protect GSLS people who are collecting the cash collections. By the time he turns over the GM position to the DGM, a total of 33 months has elapsed counting from start of programme implementation, and it is expected that at that time the Operational Self Sufficiency (OSS) ratio would have already reached nearly 100%. It will be alright to turn over to the DGM because by then GSLS has gained a strong movement (inertia) towards financial viability. The cost of having an MTA includes consultancy fee, per diems, plane fare, visa, travel / vehicle operation costs, communication costs (incurred while performing his work for GSLS), etc.
> -
: &
"9
& -
Page 115
-----------------------------------------------
'
Monitoring the programme Reporting performance Key performance indicators Getting client feedback Reviews Impact evaluation
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Chapter 16 Monitoring and evaluation

16.1 - Monitoring and reporting
GSLS management shall produce operational and financial reports each month, and submit them to GSLS BOD and to GBDF, with copies send to PAMP and AusAID-PNG. It should also produce summarized quarterly reports, annual reports and audited financial reports. Reports should also be submitted to the Registrar, as per statutory rules. Almost all of these reports should contain a comparison of actual accomplishment against set targets using a prescribed set of 17 Key Performance Indicators; see Table 29 below.
Table 29 - Key performance indicators

Key indicators Outreach Number of savers Definition and significance
Number of people who have at least one kind of savings account with the SLS; important in tracking how many clients are being served, Number of people with outstanding loans; important in tracking how many clients are being served, Number of female clients as expressed as a percentage of total number of savers; the SLS should have a bias for women because they are more reliable and dependable. Computed as loan portfolio divided by the number of loans; broken down by type of loan (regular and enterprise loan). Significant because it shows depth of reach as well as the average amount of credit risk involved; Computed as percentage of total operational revenue to the total operating expenses, including loan losses, depreciation but not including inflation costs. The OSS shows whether the SLS is already covering its costs (100% OSS) or not yet. This indicator should be tracked every month. This is computed similar to the OSS but the inflation costs are computed and added to the expense figure. It shows that the SLS has become fully cost covering, and is really viable. Shows the real profitability of the SLS; computed as the percentage of net profits to the total equity capital.
Standards
# 1 : # 1 . : C 2 : & /H : C 2 -
Number of borrowers
Percentage of female clients Average loan size
D O //=
Sustainability Operational selfsufficiency (OSS)
//H (
. : -
: &
//H -
Financial self-sufficiency (FSS) Return on Equity capital (ROE) Efficiency Client caseload (savers)
!.
: //H= - //H ' . . = (, %H C . = )H
Computed as the total number of savers divided by the total number of FOs. Shows the level of staff productivity, in terms of how many savers each FO is serving.
# "9 // 6
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----------------------------------------------Client caseload (borrowers) Portfolio caseload (kina)

Computed as the total number of borrowers divided by the total number of FOs. Shows the level of staff productivity, in terms of how many borrowers each FO is serving. Should be broken down by loan type also. Computed as the total loan portfolio divided by the number of number of FOs. Shows the level of staff productivity, in terms of how much loan portfolio they manage. Should be broken by loan type. Computed as the percentage of all earning assets to total assets. By earning assets it includes all assets that bring in actual revenues. Measures how much of total assets of the SLS are really productive. Tells how much idle assets are in the balance sheet. Computed as the percentage of operating cost in a given period (like one quarter) to the average portfolio. Tells how much toea is spent to lend and maintain one kina of loan. It is a very good measure of efficiency Computed as the ratio of all current liabilities to all current assets. It tells how much liquidity the SLS has in terms of meeting obligations that fall due. Computed as the ratio of actual principal loan collections made this quarter to the total principal loan amounts due this quarter. It is an effective indicator on loan recovery. Computed as all loans with arrears of 30 days to the total loan portfolio. Indicates how much of the portfolio is at risk of becoming defaulted or lost in view of the delinquency involved. PAR-60, PAR90 should also be computed every month. Calculates the total value of all loans written off to the value of all loans disbursed during the period. Provides an idea of how much losses were sustained by the SLS over a period of 1 or more years. Measures the amount of capital in relation to risk assets. The BPNG may have a specific formula used for calculating CAR. General CAR for banks ranges from 8% to 12%. PNG banks required to have CAR of 8%.
# "9 )// 6 #
C . =
Earning asset ratio
# +/H - -
Operating Cost Ratio (OCR) Risks Current ratio Average repayment rate Portfolio at risk ratio (PAR) Average long-term loss ratio Capital adequacy ratio (CAR)
# = . -
C /H %H
# C # : +%H ( # : # %H : /H ( %H . "9 /
C - - + ++H C &
# : - 3 "9
C #& C #& = 2 = H %
The above is only indicative and GSLS should consider the wider PNG context in deciding which indicators to use. For example, the PNG-ADB Microfinance Project has a component called Revolving Finance Facility (RFF) that will define some key performance indicators for PNG MFIs. Also, BPNG probably has some specific indicators that they require, like liquidity indicators. If the BPNG has some other indicators other than the above, then that should be generated and reported as well regularly by GSLS. Besides the Key Performance Indicators, the reports, especially the quarterly reports, should also include matters like: (a) progress made against established targets; (b) delays and problems encountered, and actions taken or proposed to resolve problems; (c) proposed program of activities to be undertaken during the next three months; and (d) expected progress in the succeeding period.
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----------------------------------------------Monitoring visits by GBDF, ADB and AusAID should be done regularly, preferably in a coordinated manner to avoid having a situation where GSLS staff spends too much time entertaining visitors.
16.2 Getting client feedback

Those who leave the membership by way of resignation or full closure of all their accounts should be asked to fill up an exit feedback form or should be interviewed by the Branch Manager. This is to gather information on why they are leaving, identify areas of dissatisfaction and identify areas where the SLS can improve upon. GSLS head office shall conduct every 18 months a client satisfaction survey by taking a random sample of members, maybe 3% to 5%, and asking them their honest opinions on the good and bad sides of SLS operations from their point of view. Suggestions can be obtained also from members through this survey. Real and honest client feedback can be very useful tools to improve the services of the SLS.
16.3 Reviews
Because of the importance of this programme to the over-all thrusts of PAMP and AusAIDPNG, periodic reviews will be organized by them, to assess the status and achievements of the programme, focusing on Key Performance Indicators as described above, and to identify the remedial actions needed, if any. Reviews should be held after 12 months, 24 months and 36 months. The review right after the 24th month will be the mid-term review and will be more elaborate that the other reviews. Budgets for the reviews are not included in the calculation of the financial requirements of the programme, as they are really external to the programme. AusAID or PAMP may also commission a study to fully document the progress, status and achievements of the Ginigoada microfinance programme, to serve as a demonstration to other microfinance organizations in PNG.
16.4 Impact evaluation

It is important to outline a process for measuring success. One major indicator of success, besides the financial viability of the SLS, is the impact on poor people. (By impact, we mean the qualitative changes or improvements in the lives of poor people, which can be measured through a number of impact indicators.) We recommend that AusAID, at the start of the programme, and working through the GSLS conduct a baseline study to gather basic information on its clientele, which will be used later on to measure impact. We recommend that a standard questionnaire form be created and used. This form, to be called as Basic Household Information Sheet (BHIS) will gather basic socio-economic data from the initial batch of beneficiaries or clients. The BHIS forms will be filled up during the time of client intake, during the first 4 months of operation of a branch. The BHIS should include key impact indicators, such as: . . - - = - C . C . = - . = 1 - . : ; . . = Page 119
---------------------------------------------- 1 ; 8 - . 9 2 . . - - 8 7:= . = ; . = . - : - = = C 7 ; = = - . 8 C 7:- ; = :-
- -
Around 400 households will have to be included in the baseline survey. The BHIS data will be processed and analyzed; a profile of the clientele prepared. Then, near the end of 3 years of implementation, AusAID should commission an impact evaluation study, in cooperation with ADB and GSLS, to re-gather the same socio-economic data and compare that with those gathered during the baseline study. The study will reveal how much household impact was accomplished. A small budget has been included both the baseline study and the final impact evaluation study.
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-----------------------------------------------
(a) Specific survey objectives

Before we can design the methodology for Ginigoada, it is necessary to first understand the actual needs of low-income people for financial services. Hence, as a major critical part of this feasibility study, we conducted a sample survey called Microfinance Survey in Port Moresby, which had 6 specific purposes, namely: 8 8 8 . !8 %8 )8 C - . : A C . = : = = 6 6 . = . := . . - . . : - . . : : . : C = . = - C . =
Related to objectives 3, the survey identified both the amounts poor households usually borrow and the amounts of potential weekly savings, which will be useful in estimating demand.
(b) Sampling frame, size and selection

The survey was conducted in September 23 October 2, 2003, consisting of interviews with 190 poor households randomly selected from the three major areas or electorates of Port Moresby. Table 30 below shows the covered settlements / villages and the numbers of households selected per settlement / village.
Table 30 - Survey areas and samples selected

Name of Settlement Electorate MoresbyNumber of Households selected
Motu-Koitabun areas: Kira-kira Pari Vabukori Hanuabada Baruni Tatana Korobosea Highlander areas: Morata 9 Mile 6 Mile 5 Mile
63 households
South South South North-west North-west North-west South North-west North-east North-east North-east 11 12 9 10 9 6 6
62 households
10 18 15 5
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----------------------------------------------Erima 2 Mile Momase areas: 8 Mile June valley Gerehu Papuan areas: Gorobe Talai Taikone Sabama Kaugere Vadavada North-east South North-east North-west North-west South South South South South South 4 10 21 households 8 6 7 44 households 8 8 6 8 8 6
TOTAL
190 households
In creating the sampling frame, we looked at the map, and all areas which are considered middle-class or rich peoples enclaves were eliminated from consideration. We identified the specific settlements or areas or communities where poor and low-income people live. Then, we estimated roughly the population size of each of the settlements, based on the PNG 2000 census data, and on common knowledge. Then we took a proportionate number of households from each settlement, making sure that bigger settlements get bigger sample allocations, while smaller settlements get lesser sample allocations. Then, lastly we re-listed the settlements based on electorate and the ethnic groupings. We made sure that all three electorates, i.e. Moresby South, Moresby North-West, and Moresby North-east, are wellrepresented.79 Table 31 below shows that all three electorates were well represented in the sample.
Table 31 Electorates where respondents live

Frequency Percentage
Moresby South Moresby North-east Moresby North-west
102 61 27
54 % 32 % 14 %
While selection was at random, to ensure that the sample represents the wide range of household characteristics, we took steps to ensure that the sample reflect reasonable balance in terms of gender, ethnic grouping and economic activity. We made sure that we covered households with existing micro-businesses and those without. Efforts were also exerted to include some salaried people in the sample given that it is hard to find them in the settlements during weekdays because they would naturally be away from their residence during the day (when the survey was held). Most importantly, the ethnic groupings were carefully considered, to ensure that we covered all of the known major ethnic groups. The survey tool was carefully designed; see Annex E for a copy of the survey questionnaire used. The data collection was done largely by 9 Data Collectors who were organized into three survey teams. The Data Collectors were trained about the survey tool and about the basics of interviewing. Then, the teams were dispatched to the various settlements, led by a Team
+
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7 89 = :- - : 6 - ;
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----------------------------------------------Leader each. They covered all areas systematically over a four-day period. To ensure that information are valid, we cross-checked and validated the survey results with the information gathered from various key informants in the surveyed communities as well as from literature or research documents.
(c) Basic socio-economic information

We gathered basic socio-economic information about each of the household-respondent.
Table 32 - Gender profile of respondents

MotuKoita
Female respondents Male respondents Total (gender) 36 27 63
Highlanders
30 27 57
Momase
19 19 38
Papuan
15 15 30
Islander
0 2 2
Total
100 90 190
Percentage
52 % 48 % 100 %
The sample consists of 52% are female and 48% male. The average age of respondents is 36 years old; see Table 25 above. Majority of respondents are married people (85%); 9% are single or unmarried; 4% are divorced or widowed. Given that there are many ethnic groups in POM, we grouped them into five major groupings based on regional distribution. The Highlander group includes the Hagens, Chimbus, Gorokans, Engans, Taris, and South Highlanders. The Momase group includes the Morebeans, Sepiks and the Madangs. The Islanders include the Tolais, Pomios, Kombes, Bukas, and people from Manus and New Ireland. The Papuan group includes the Keremans, Goilalas, people from Western province, Milne Bay and other Gulf areas. We separated the Motu-Koitabuns from the Papuans, although they technically belong to that large group, because POM has a substantial number of Motu-Koitabuns. They are the original dwellers in POM and they own the land in which much of the city now stands.
Box A-1 - Brief background: culture of PNG

There are four regional, cultural and political groups: Papuans (from the south), Highlanders, New Guineans (from the north) and Islanders. There is, however, considerable cultural variation within each of these groups. Because PNGs terrain is marked by imposing mountains and extremely rugged territory, different population groups developed in virtual isolation. Each group developed its own language and its own tribal culture, a development that gives Papua New Guinea one of the world's most diverse and fascinating cultural landscapes. There are over 750 languages in PNG (representing about one third of the world's indigenous languages). This dizzying array has brought about the need for a lingua franca, and Pidgin (or Neo-Melanesian) has gained in importance and prestige in recent years and is great fun to learn. Borrowing words from many languages, it is primarily derived from English and German, but only covers about 1300 words. Although English is the official language in schools and government, almost 800 distinct languages are spoken in the islands. Another popular language is Motu, the local second language of the Port Moresby coastal area. Many people still live in small villages and follow traditional tribal customs. The Christian church has been extraordinarily influential throughout PNG with most Papua
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----------------------------------------------New Guineans regarding themselves as Christians (the largest denominations are Catholics, Evangelical Lutherans and United Church). Pantheistic beliefs are also widespread and traditional rituals are integral to Papuan culture. For example, people who live in danger of crocodile attacks are likely to give crocodiles an important role in their culture, while farming communities often place much emphasis on the weather, accordingly celebrating fertility and harvest. Placating the spirits of ancestors is a dominant theme in traditional beliefs, while the fear of practices such as sorcery and witchcraft is also widespread.
Table 33 below shows the composition of our sample broken down by ethnic grouping. The Motu-Koitabuns and the Highlanders are the biggest groups represented, with 33% and 30% respectively.
Table 33 - Ethnic mix in the sampled households

MotuKoita
Frequency Percentage 63 33 %
Highlanders
57 30 %
Momase
38 20 %
Papuan
30 16 %
Islander
2 1%
Total
190 100 %
People of the same ethnic group tend to live together. Based on information from several long-term residents of POM, we identified the places or settlements where various peoples groups live. The Highlanders are mainly concentrated in Morata, 6 Mile, 2 Mile, 9 Mile and parts of Gerehu. The Momases are living in 8 Mile and some parts of 8 Mile. The Keremans and other Papuans live in Badili, Kaugere, and other areas of Moresby South. In Erima, there are large numbers of Engans. The Motu-Koitabuns live in distinct villages and they are in Kira-Kira, Korobesea, Hanuabada, Pari, Vabukori, Elevala, Tatana and Baruni. On the other hand, there are also many settlements which are mixed, where there are no dominant ethnic groups, for example places like Horse Camp, Talai and Segani. Our field interviews with many key informants revealed that there are distinct differences in the needs, behavior and preferences of these various ethnic groups; hence this suggests the need for conducting a comprehensive social mapping of those parts of NCD where lowincome people live, in order to understand their locations and concentrations. Sources revealed that there is a high rural-to-urban migration going on. Most of the informants agree that in-migration rate is high; the PNG 2000 Census revealed that NCD is growing at a rate of 2.6% every year. The census study showed that nearly 60% of all residents of NCD came from other provinces. Migrants come from all provinces of PNG, but the biggest sources of migrants to NCD are the following (in order): Central, Eastern Highlands, Gulf, Chimbu, Morobe, and Southern Highlands. The survey questionnaire had a portion where the Data Collector examines the residence of the respondent and indicates the quality of housing, as a proxy indicator for poverty level. The intent was to get a rough idea of the level of poverty of the respondent household.
Table 34 - Poverty levels, based on housing quality

Better off households, with high quality housing
21
11 %
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----------------------------------------------Poor households, with moderate quality housing Very poor; housing is very poor No information or can not judge housing quality 102 45 22 190 54 % 24 % 11 % 100 %
Total
The results are in Table 34 above, and it is clear that a big majority of respondents (78%) belong to the poor and very poor brackets. Around 11 % belongs to better-off category. For a small portion (11%) of the sample, it was not possible to judge the level of poverty because the place of interview was not in or near their place of residence. Through a number of interviews, we found out that the poorest areas in NCD are located in Tete (in Gerehu), Horse Camp (in Sabama), Kaugere, parts of Morata, Rabia Gini (in 2 Mile), and Talai (in Gorobe). In terms of population size, it seems that the three biggest settlements are in Morata, Kaugere and Tete. The survey questionnaire contains a portion asking for educational attainment of the respondent. The survey showed a low level of educational attainment of adults in households. Around 15% have received no formal schooling; nearly half (49%) have some primary-level education and only 18% have received some high school education. The results are shown in Table 35 below.
Table 35 Educational attainment

1 2 3 4 5 6 7 8
Received no schooling at all Some primary level education Some high school Finished high school Some college Finished college Post-graduate
28 93 34 19 7 6 0 3
15 % 49 % 18 % 10 % 4% 3% 0% 2%
no response
(d) Livelihood pattern of low-income people

A major part of the survey was about the livelihood strategies being employed by low-income people. Only a small number (21% of households) are in formal employment. Majority of respondents (40%) are self-employed, engaged in one, two or three IGAs or microbusinesses. Examples are: selling of betel nuts, baking of bread and selling them on the streets, ice-blocks, lollies, running a canteen, selling of vegetables, coconuts, bananas, root crops; selling of beer and cigarettes, running a mini-bus (called a PMV public mobility vehicle), operating a trade store, small backyard poultry, garment-sewing (the meri blouse are quite popular), and some are involved in house-building contracting. Most of the IGAs found were connected with trading and small-scale service enterprises. A very small number of people were found engaged in production enterprises, such as wood-carving, bagmaking, footwear, decorative pottery and metalcraft.
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----------------------------------------------The PNG 2000 Census80 says that 80% of men and 60% of women in NCD are formally employed in wage jobs, but our survey and field interviews showed that that this not the case in settlements surveyed where low-income people. For example, only 21% of respondents said they are employed in formal jobs. Informants said the number of people with formal employment in villages like Hanuabada, Kira-Kira, Talai, Erima, 8 Mile, Kaugere, etc. are not many; that there are many unemployed; that many are idle among young people and adults of working age. It seems therefore that, perhaps, both of these findings are correct, in that over the whole NCD wage employment is high but it is low in settlement areas and poor villages that we surveyed. One key informant said that young people in her village are not motivated to work because of the prevailing who you know atmosphere. Opportunities to find a good job in the formal sector are few; young people find it hard to find jobs, and many have given up trying. This remark shows that reliance on the formal sector is still high among her village people, and they seem to have little appetite to engage in self-employment activities. A disturbing finding is that a very substantial number of people (42%) have no means of earning incomes.81 The Census somehow validated this by reporting that around 15,000 people in NCD are unemployed. It is not difficult to imagine that some of these idle people eventually get involved in petty crimes in order to survive in the city. Table 36 shows the detailed results.
Table 36 - Means of livelihood

currently employed (formal employment) employed occasionally / but irregular engaged in one small business engaged in 2 micro-businesses engaged in 3 or more micro-businesses no means of livelihood / no job dependent on spouse or parents or relatives
21 13 48 17 11 67 13
11 % 7% 25 % 9% 6% 35 % 7%
When we cross-tabulated this with ethnic grouping, it became clear that the Highlanders are more economically active and entrepreneurial than other peoples groups. Some highlander households are engaged in 1, 2, or 3 (multiple) IGAs, all running at the same time. Table 37 below shows that highlanders households have more breadwinners in the households. The Highlanders are aggressive, risk-takers, hard-working, business-minded, demanding and persevering. For example, most of the public buses are owned by the Hagens and other highlanders. This finding was validated, without exception, by the key informants. Next in terms of economic activity are the Momase people.
Table 37 - Number of breadwinners in the households

MotuKoita Highlander Momase Papuan Islander Total Percentage
"9 /// " ( - ! H -
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= "#$ = %H -
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81
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----------------------------------------------only one parent as bread winner both husband and wife earn income children also earn money multiple bread winners no one in the household earn money
33 10 1 1 20 23 23 1 2 8 17 10 1 2 7 14 8 1 0 6 1 1
88 51 4 5 42
47 % 28 % 2% 3% 20 %
The Papuans and the Motu-Koitabuns had the lowest business activity, where large numbers of them are not formally employed and not engaged in any kind of business. Key informants have validated this and they mentioned that the Papuans, including the Motu-Koitabuns, are more laid-back, idle, not risk-takers, not business-minded, and generally not economically active. Their emphasis is more on safety; being relaxed (stress-free) and not taking risks. Many key informants revealed these common observations: the highlanders are forceful, aggressive, risk-takers, entrepreneurial, business-minded, run many shops, do everything to make money; they grow vegetables, collect rubbish, raise ducks, own and run PMVs, do petty trading, even deal in stolen items. Highlanders will be good savers and borrowers. There are also many stories where highlanders come to the city, saw the opportunities to make business, save some money to create his own capital, borrow from wantoks to supplement his savings, start a small tiny business, re-invest his profits repeatedly, and in a just a few years have become rich; Highlanders have this tradition of a big man many assets, trees, fruit trees, pigs, wives, etc. Accumulation of wealth is a respected and admirable trait or characteristic in their ethnic group; they generally can say NO to their wantoks especially if their core capital is at stake; they will give in to wantoks but not to the extent of sacrificing own core capital for business;
(e) Saving behavior of low-income people

A major portion of the survey is about savings behavior of people. We asked people if they save money, and if so, if it is done regularly. We also asked them where they put their savings.
Table 38 Habits on saving money

MotuKoita Highland ers Momase Papuan Islander Total %
no, I do not save yes, I save but not regularly yes, I save regularly no response
37 16 4 4
23 9 24 1
11 13 14 1
15 10 5 0
1 1 0 0
87 49 47 6
45 % 26 % 25 % 3%
Around 45% of people do not save money because there are no opportunities to save. Three-fourths of all respondents (75%) said that there are no banks, credit unions, formal or informal savings schemes that are accessible to them and where they can safely put in their savings. Even the informal sande-sande is scarce and non-existent in many settlements.
Table 39 Which are the service providers

none; there are no service providers here no specific answers 142 22 75 % 11 %
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----------------------------------------------local bank sande-sande credit union church-based savings scheme 6 5 3 1 3% 3% 2% 0.5 %
About 26% of people say they save in a regular way, and another 25% of people say they save little amounts of money but it is irregular. This shows that more than 50% the people are already saving up some small amounts of money. Around 30% of people use local banks, but given the lack of access to banks, most people (34%) simply keep it at home. People who save and who have excess cash simply hoard the cash at home. Based on anecdotal evidence, literature82 and as revealed by several key informants, cash hoarding seems to be a prevalent and common practice across all ethnic groups and in all areas. It is more pronounced among highlanders, and those with brisk businesses.
Table 40 Where people place their savings

nowhere because I do not save I keep my savings at home in a local bank in a credit union or SLS sande-sande
66 65 55 2 2
35 % 34 % 29 % 1% 1%
A few people living in settlements far from the city83 save in the form of non-cash assets such as pigs, chickens, etc. But this is not a common practice in NCD as a whole because spaces in settlements are very limited, and there seems to be certain city rules that prohibit raising of livestock within settlements.
(f) Features of savings products people want

We asked people why they are using the savings services of the providers they mentioned, to find out what features in savings products they value the most. Most people cited safety as the most important feature they want. They cited the following: Safety of capital (21%), Accessibility, can be withdrawn anytime (10%), Ease of transaction; easy to deal with or friendly (10%), Scheme is well-managed (2%). It is interesting that very few were concerned with earning high interest on their savings (1%); rather, people want safety, access, friendliness and dependability.
(g) Why do people save

We asked people why they are saving up some money or why they want to save. Majority said they want to save for the rainy days, for any future need of the household (23%), to
" ' 6 ' = = ++ , = = =
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----------------------------------------------meet food needs (8%), to save up money for the annual school fees (6%) and for a number of varied, multiple reasons (17%); see Table 41 below.
Table 41 Why people save money

no response (mainly from people who dont save) for any future need of the household for varied multiple reasons to meet our food needs for the next days to pay for school fees to invest in small business
78 43 32 16 11 5
41% 23 % 17 % 8% 6% 3%
The survey revealed that people save some money to pay for the school fees. Most households are having difficulties in raising money every year to meet the school fees. The amounts needed are quite large given the small incomes of people. For primary school, the school fee range from 70 kina to 150 kina per student per year. For junior high school, it is around 200 to 400 kina. For senior high school, it is 500 to 1,000 kina. People run to their extended families and wantoks to raise money for this large expense, and there is not much that can be raised if the relatives also have few financial resources. This accounts for the large numbers of school leavers (drop-outs). Without any exception, people acknowledged in focus group discussions and interviews that they desire to save up money for this large recurring expense.
(h) Potentials for savings mobilization

Nearly three-fourths of people (71%) do not save money or practice it irregularly; however, people are saying that they can save small amounts of money each day if there is a simple and convenient way or scheme of depositing those small savings in a safe place. Table 42 below shows how much people said they can deposit each week in such a convenient weekly savings scheme.
Table 42 - Potentials for saving money

Frequency % 35% 24% 10% 3% 4% 4% 1% 18 % 100 %
1 20 kina 21 - 50 kina 51 - 100 kina 101 150 kina 151 200 kina 201 - 500 kina 501 1,000 no response
66 46 20 5 8 8 2 35 190
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----------------------------------------------Nearly 60% of people say they can save 50 kina or less each week. The great majority of people (70%) say they can afford to save money of about 100 kina or less. 84 Interestingly, a significant number of people (14%) have the ability to save even bigger amounts (more than 100 kina pr week). In short, this suggests a strong potential demand for savings services among low-income people. A significant portion of people (18%) did not make any specific or clear response, which could mean that they are not saving money currently, or that they have no idea on how much they can save each week. This could represent a dormant demand or a sleeping market segment but can be awaken later if they are presented with real opportunities to save money on a weekly basis. This data suggests that, if a microfinance programme is started, the amounts of savings deposit per household would be generally small ranging from 10 to 100 kina per week, with an average of around 15 to 20 kina per week per person. This seems small, but if multiplied by hundreds and thousands, such small savings can easily amount to millions of kina. A microfinance programme serving a few thousand can mobilize several million kina over 3 or 4 years. For example, assuming an average pay-in of 18 kina per week, a programme that serves 4,000 people can easily collect 3.6 million kina of savings each year.
(i) Borrowing behavior of poor people

The survey yielded good insights on borrowing behavior: where they borrow, reasons for borrowing, the amount of their usual borrowings, and how well they repay back the loans.
Table 43 - Sources of borrowings

Motukoita Highlande rs Momase Papuan Islander Total %
No, I do not borrow money Yes, I borrow money

- from relatives and wantoks - from my friends - from a trade store - from credit union - from church-based scheme - from local money lenders - from finance companies - from local bank - from others - multiple sources
18 13 2 1
17 17 1
11 11 1 1
11 13 1 1
58 132 54 4 4 0 1 32 3 7 3 14
30 % 70 % 41 % 3% 3% 24 % 2% 5% 2% 11 % 7%
13 1 3 2 5 3
3 3 1 5 4
8 1 4 2
7 2
No response
10
Table 43 above shows that around 70% of people borrow money, while only 30% dont. The most common source of borrowing is relatives and wantoks (41%), then followed by
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----------------------------------------------moneylender (24%). Only a few use finance companies (2%) and banks (5%). Borrowings from banks and finance companies were made by people who are formally employed and by the better-off households.85 Their numbers are small in relation to the whole population of the village, where majority are unemployed and engaged only in various small-scale IGAs. We asked people why they borrow money and Table 44 below show their responses.
Table 44- Reasons for borrowing money

To meet basic consumption / food needs To meet common needs of the household Multiple reasons given To increase size of existing micro-business No specific reason given To build or repair house To pay for school fees To pay for bride price
53 25 20 7 7 3 2 2
28 % 13 % 11 % 4% 4% 2% 1% 1%
The purposes for which they borrowed are summarized in Table above. Majority of households (41%) borrow for immediate or near-immediate needs; to meet basic consumption and food needs. Realizing their vulnerability due to irregularity of their income streams, poor people are borrowing some money to ensure that they will have something to eat on days that they have no incomes. A few use the borrowed money to improve their existing micro-businesses. We may conclude that people obtain a loan to meet both business and common household consumption needs. Around 51% of poor people surveyed are indebted to various lenders, and the average outstanding loan per household is 405 kina. Majority of respondents say that these are owed mostly to moneylenders. Borrowings from wantoks, relatives and family members are very common (41%) in all the settlements and villages surveyed. But the amounts of those borrowings are not really recorded, known or enforced.86 They are informal loans extended to members of the extended family or members of ones wantok, hence they are really gifts and hand-outs, and not really as loans as understood in modern economies. The survey revealed that a big number of households (24%) borrow from moneylenders to meet various common and emergency needs, in spite of the high interest rates. This pulls such families to deeper indebtedness and poverty. This provides clear evidence that even a simple service, like savings can create large benefits for poor and vulnerable households. In case of emergencies, they need not anymore turn to moneylenders, but instead they can
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Page 131
----------------------------------------------simply draw on their savings. The money that is supposed to be paid as interest to the moneylender is saved. We asked the respondents about the loan size of the latest loan he/she got. Table 45 below summarizes their answers.
Table 45 - Value of latest loan obtained

Frequency % 49% 9% 16% 2% 7% 5% 5% 7%
No borrowing 1 10 kina 11 20 kina 21 30 kina 31 50 kina 51 100 kina 101 500 kina 501 kina or more
90 17 30 3 13 9 10 12
The average amount of borrowing is rather small at 405 kina (that is the average amount of outstanding loan of the household at the time of the survey). Around 41% of all borrowings are for amounts less than 200 kina. About 10% of people borrow amounts greater than 200 kina. This suggests that the Ginigoada microfinance programme should offer loans of small sizes mainly. Most of the loans should be for 200 kina and less. Offering big loans is simply inappropriate for majority of the poor. We asked if the respondent has fully paid back the latest loan that he or she got. results are summarized in Table 46 below. The
Table 46 - Have you fully paid back the loan?

Frequency %
Yes, fully paid No, I have not yet paid No, I will not pay it back No response
77 20 4 89
40 % 11 % 2% 47 %
While 40% of people said they paid back the loan, it is disturbing to note that some people said that they will not pay back the loan at all. It seems to be their honest answer, indicating a deliberate decision on their part not to settle the loan. A big percentage has no clear response to the question (47%), putting in doubt their intention to pay back the loan. Again, this clearly shows the poor understanding of people regarding the obligations attached to loans.
Table 47 Frequency of borrowing

Frequency % 52 % 29 % 6%
Did not borrow Borrows 1 to 5 times a year Borrows 6 to 10 times a year
98 56 12
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----------------------------------------------Borrows 11 to 20 times a year Borrows 21 times or more

7 10 4% 5%
We asked people how many times they borrow in a year. We found out that people generally borrow four times a year (the average we got was 3.7 times); see Table 47 above. Nearly 30% of people borrow 1 to 5 times a year. This suggests a short repayment term for loans, probably as short as 2 or 3 months only. The data also revealed that some peoples groups tend to borrow more frequently than other peoples groups. We found out that the MotuKoitabuns borrow more frequently than other groups. The Motus prefer many small loans, and they borrow frequently, probably because they money to cover basic consumption needs (well, we know that few Motus are involved in IGAs). The other three groups borrow generally less than 5 times a year. Highlander and Papuan households seem to want usually fewer loans but of bigger loan sizes; maybe because they use loans mainly for business investments. We also asked people if they need a loan for their business expansion. 52% said they dont need a loan for that purpose, while 47% said they would need a business loan. When we asked them the amount of loan they need, we received some reasonable answers and some outrageous answers (some were probably thinking that we are out there handing out money). Anyway, around 20% said they would need loans ranging from 50 to 500 kina and 7% said they would a loan ranging from 500 to 1,000 kina. Demand for small business loans among highlanders is expected to be high. For example, key informants interviewed in Morata said that there are many small businesses there that need small business loans.
(j) No existing formal lenders

No formal financial institution identified. The survey revealed no formal or semi-formal institution that provides financial services in all settlements covered by the survey. There was no bank, credit union or even credit-providing NGO detected. There are wage-earners, who get loans from formal financial institutions like Kina Finance and FinCorp, but these financial institutions are accessed through their employers, and repayments are handled through payroll deductions. None of the finance companies are known to be serving the community as a whole. Though there are banks in the city, we found out that access to banks is generally poor. Only a handful use banks for saving and borrowing. When we asked why they are not accessing formal banks or finance companies, they gave us a number of common reasons. Table 48 below summarizes reasons given.
Table 48 - Reasons why people are not using banks /formal institutions
Frequency percentage
Bank rules are too complex that we dont understand them No response No specific or clear reason given I have little money to bring to the bank, I will only incur travel costs Multiple reasons given
55 47 33 23 9
29 % 25 % 17 % 12 % 5%
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----------------------------------------------Banks ask too many papers, like IDs, passports, endorsements etc I have no regular job or assured income hence I dont bank We are afraid of banks; they are unfriendly to us Banks extend big loans only; but we need small loans
9 7 7 2 5% 4% 4% 1%
Poor people are not using the financial services of these formal service providers because of the following reasons: 8 ; 1 B 8 . . - 1 8 5 ; 8 ' 8 - . ; & = ; . : = ; - - . ; : :5 ; B9& = ;C # : ; - . = 6 3 6& . C ; ; 1 : = - : ;= :; - F F: G G 6 +H . . -
Box A-2 - Story of the disappointed bush woman:

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(k) Informal money lenders abound

The only kind of informal lenders in the various settlements and villages are the local sali moni, local moneylenders. This is the most common source of loans to low-income salaried people who badly need loans; 24% of people surveyed they regularly borrow from moneylenders. We found out that there are many local moneylenders in the various
; : B "9= - $ 5 > - $ > . * ; . : ; E ; = .
Page 134
----------------------------------------------settlements, most of them small-time operators. The sali moni lends only to wage earners, and they do not lend, as a general practice, to people who are unemployed or to those dependent on businesses or IGAs. They charge excessively high interest, with 960% per annum as the most common practice. For example, a common scheme is the 20-8 scheme, where if one borrows 20 kina, he has to repay that 20 kina in 2 weeks time plus 8 kina profit. Thats 40% interest in 2 weeks time, translating to 960% interest per annum! We found cases where the moneylenders charge 1,200 % per annum. By far, the most common scheme is that of 20-8 as described above (960% pa). Loan sizes range from 20 kina to 200 kina. Key informants revealed that usage by wage earners of moneylenders services is high. Many of those wage earners are caught in vicious debt traps, where all their pay, each payday, goes to finance companies and moneylenders, and then they have to borrow again to survive for the next two weeks. These pull them into deeper debt and poverty People without formal jobs have little access to moneylenders because the latter lend to wage earners only, which comprise a small percentage (15 to 20%) of households in a village. Moneylenders also do not, generally, lend to people engaged purely in business or small IGAs. On the other hand, we found out that in a few settlements, there are informal lenders that extend tiny loans ranging from 10 to 50 kina, and usage of this type of credit is quite high. People borrow to tide them borrow, to meet basic survival needs. There are some sande-sandes, which are informal rotating savings associations; but the practice is uncommon and scarce. There was no formal cooperative or credit union found.89 We found an informal savings group that was recently organized in Elevala, a Koitabun village; see Box A-3 below. It was formed at the initiative of local women leaders and it seems be working well. Another informal savings group was found in Lower Talai settlement, see Box A-4 below.
Box A-3 Women Savings Group in Elevala

- < . : C < : . = %=/// ; - = = , . : . F4 - . = . B $ - . , - (- E 7 . // = !/ , 5 : . :; - . : - 8 8 ;7 = : : ; , . =
- ; - 9 9 - :
. - :- . = = - : ;
( .
Borrowing from relatives and wantoks The study revealed that people generally borrow from their relatives and wantoks because: a) the loans do not carry any kind of interest; b) the loans is generally not repaid at all, or will be reciprocated over an extended period of time which is undetermined and uncertain; c) it is easy to talk to and deal with relatives, as this is part of tradition of families and clans, d) there are no paper work involved. People also
89
&
- -
Page 135
----------------------------------------------borrow from their neighbors and friends, for emergency needs and for many household needs. This kind of borrowing is a frequent and common practice. While borrowing from relatives and wantoks is a common and prevalent practice (41% of people say they borrow from their relatives and wantoks), they dont seem to be comparable to real financial transaction of a loan as understood and practiced in modern economies. Key informants confirmed that this kind of borrowing (from relatives and under the common wantok traditions of most Papua New Guineans) is not a true loan in the sense that the wantok loans are not really repaid, in a specific time-bound manner, and with interest. There is no expectation or demand to repay it back, although there is an element of reciprocity involved. The borrower may repay back the lender probably in another time or after several years, when the lender happened to become financially needy. The payback is not necessarily the exact amount of the original loan, and not necessarily in money, but it could be in the form of gifts, labor, materials, etc. In short, this kind of wantok borrowing should not be considered as a true financial transaction, but more like a social transaction and part of the safety net mechanisms of extended families. Key informants have revealed that the wantok borrowing, as described above, is the primary cause why many credit programmes in the past have failed. The wantok borrowing has bred a poor and wrong understanding of modern financial concepts, and is behind the poor credit culture in the country.
Box A-4 Mothers Savings Group in Lower Talai settlement

& . = ; & - : %/ ; :B9& . : : ; 9 -= = 4 . : - : E ; : - - : - : = =2 : :- 5 5 = ( ; = :- -
; - : 4 ;
B . :C -
- = = - : $
= - : = /;
> - 5 //
. -
- . -
In other words, people do not pay back loans extended by microfinance programmes because they do not understand fully that the loan must be paid back, and with interest, and paid in a timely manner. They have been used to the loans given by their relatives and wantoks (and money doled out by politicians, churches and donors90) which are not repaid at all. They consider loans from microfinance institutions as free money similar to wantok
+/
B 6
Page 136
----------------------------------------------loans.91 Poor repayment leads to collapse of microfinance institutions.92 We believe that this is the main challenge facing the microfinance sector in PNG.
(l) Coping mechanisms of low-income people

We ask people how they manage emergency needs in the family, let us say, a serious and costly illness or a sudden death in the family. Table 49 below show their responses.
Table 49 - Ways for handling family emergencies, including death

Our wantoks give us money We ask money from relatives and get loans from wantoks and other people We draw on our savings Multiple responses We borrow from money lender No response / no clear response given Our friends and colleagues help us We have insurance coverage
101 37 14 9 6 18 3 2
53 % 20 % 7% 5% 3% 9% 2% 1%
A common prevalent practice found in all villages and settlements is that of helping households in emergency situations or who suffered a sudden death in the family. More than 73% of respondents say they rely on their wantoks, relatives and clan members for financial help. In certain small settlements, the whole settlement comes around and helps out, providing financial assistance to the affected family. The extended family is also the main fallback when households suffer from emergency needs like serious sickness, hospitalization, accident, etc. Examples: In larger villages, like Hanuabada, it is the clan or extended family which provides full support and financial assistance. But the people in that village also make small financial contributions to cover the costs of burial and the post-burial activities. Another example, in the Erima settlement, using the wantok system, the Southern Highlanders are able to raise 15,000 to 20,000 kina in cases where one of their wantoks suffered a death. The wantokism, in these situations, provides a functional and strong mechanism for households to cope with major financial emergencies. It is a positive contribution to family welfare. We found out that costs of burial is quite high in Port Moresby, where most people cling to a strong belief that the body must be buried to the home village where the person was born.
91
&; : ; C
: :- -
- . -
; 0 F9 : C B
: = : C
"9
C = - .
;
+
G 7" . > . 8 . . : ; = . - . . . C 6 . . . . C= - : E = = 4 - ; =
&; : C -
; .
Page 137
----------------------------------------------Except for the Motu-Koitabuns whose home is Port Moresby itself, the other ethnic groups have to contend with the high costs of transporting the body to their respective home villages. Given the lack of roads or naval transport, there are no options but to charter flights to transport the body. The high transport costs (airlift) and the attendant post-burial ceremonies and costs make burying the dead a big financial drain indeed for most households. Though the wantoks and family members help out in financing this need, the poorest and most disadvantaged households can not raise the needed amounts for burial. For lack of money, the poorest are forced to bury their dead in Port Moresby cemetery, which is not really acceptable to their families or clan. This residual need to cover burial costs suggests the need to offer a micro life insurance scheme that will supplement the wantok system. The survey showed that few people currently use and appreciate formal life insurance products to meet emergency financial needs. There were only a few people who are members of formal insurance schemes such as those offered by the Workers Mutual Fund Ltd and the National Teachers Insurance Fund Ltd. Understanding of the life insurance concept seems poor also, currently. Besides the wantoks and family members, there are others who provide financial assistance to distressed households, including churches (5%), informal mutual aid clubs (3%) and insurance schemes (2%). We found no government agency providing financial assistance to bereaved families. However, it was found that people get some small amounts of financial assistance from their MPs, especially to defray the costs of coffins, but the amounts given by politicians are usually small; hence insignificant.
(m) Quantitative estimates on supply

It is difficult to quantify the amount of supply available given that there are only informal money lenders on the ground. A rough estimate can be as follows: If there are 2,000 people in the villages borrowing 50 kina each from a money lender, we can assume that a supply of around 100,000 kina is being provided by informal money lenders. We can also assume that finance companies provide probably 1,000,000 kina in terms of loans to salaried workers. Finance companies, such as Kina Finance, revealed that personal loans (such as the one taken by workers for personal use) comprise a small portion of their loan portfolio. Their biggest lending goes towards commercial loans, auto loans and real estate loans, which generally does not concern the target population that we are studying.
(n) Quantitative estimates on demand for microfinance services

First estimate: Based on the results of the survey, a rough estimation of demand for microfinance services was done, by multiplying the average numbers with the number of households, and adjusting for certain factors. Table 50 below shows details of a conservative minimum estimate of demand, assuming that a minimum number (25%) of households would be interested to join the microfinance programme.
Table 50 - First minimum estimate of demand

Town areas
9 > AD . 4 - A ; 9 A
Pop'n
SAVINGS %=/) =/%/ +=+++ = =) !=/)% %= + != / %H %H H %H +/ =/ ) ! = / ) %=) / =! = ) ! = !! REG LOAN !%= !=!/ !)=+%% !=% %H %H %H %H Enterp. loan ) = / )= =/! +/= !!
Page 138
----------------------------------------------3 ; A; < ; A< : A4 2 ; A" 3 =! + =+)/ =%! =+ + )= + != !) !=) != = + =! ! %H %H %H %H %H = = % =/ ! ! )/ 7,745 ! =/+ /=% / =+ / =%! ! %=+/+ 5,421,167 = =)% += % )=)+ )!= + 2,091,022 %H %H %H %H %H +/= ) )= ! =%) =! ) !%=) 580,839
Legend: M M M M
= 1
. 7:- -
C -
:- . 7 8
"9 /// # 1 8 : = .
. -
= 1 . !; 1 3 . 7 8 -
- // ; 8= -
M M
4 : 2 C . 78 : - 1 -
- // ; . : ;C %/ : ; - : 1 7 /; 7 8 . - : 1 ; 7 %H8 : : ; . : 1 2 6 = . 3 2 7 // ; 8 : - -
= :
The rough estimates under this set of assumptions are as follows:

The total number of qualified households in areas will be around 7,745 households. The gross demand for savings services will be around 5.4 million kina per year The gross demand for regular loans will be around 2.0 million kina per year, while the demand for small business loans will be around 580,000 kina per year; hence gross loan demand is around 2.58 million kina.
Second estimate: If the assumption on the percentage of households who will qualify and participate is raised to 40%, then the number of qualified households will increase to 12,287, and the demand estimates will be as follows: 8.6 million kina for savings services; 3.3 million kina for regular loans; and 921,000 kina for enterprise or small business loans. Gross demand for loans will be 4.23 million kina. See Table 51 below for details on how these were arrived at.
Table 51 - Second estimate of demand

Town areas
9 : 4 9 3 < ; AD . A A ; A; A< : A4 ;
Pop'n
SAVINGS %=/) =/%/ +=+++ = =! + =+)/ =%! =) !=/)% %= + != / != !) !=) != !/H !/H H !/H !/H !/H !/H =+ =+ = % =)%% =!% =) ) ! =/ =//+ = = ) = ) = !)= % = %)=+!% = +)=+ = % = ) REG LOAN + = % ! +=/! !)=+%% % += / % = + %//= ! !!)= )/ %H %H %H %H %H %H %H BISNIS LOAN / =+)% =+% =/! !!= / !%= =+% != //
Page 139
----------------------------------------------2 3 ; A" =+ + )= + = + =! ! !/H !/H )+ + ! 12,287 ! !=/ % ) =!%% 8,600,826 )= % ) = ! 3,317,461 %H %H % = )% =/ 921,517
Of the two estimates above, the second one is more realistic given that the number of lowincome people in Port Moresby is large, and placing it at 25% would not reflect reality. Large numbers of people live in these settlements and villages and their numbers continue to increase, as migration continues unabated. (Population of NCD is growing at the rate of 2.6 % per year.) Some informants opined that the proportion of low-income people is definitely higher than 50%. The PAMP paper disclosed that poverty incidence in NCD is 25% in 199693; meaning 25% of people in NCD live below the poverty line which is US$1 per day. Given that our target population will include not only the poor (those living below the poverty line) but also some of the low-income vulnerable households from the lower middle class, then the assumption of 40% seems to be a reasonable and conservative one. If we assume that the proportion of low-income people in NCD is around 50%, then the above estimates further increase to: 10.8 million kina for savings services; 5.3 million kina for loans.
(o) Gap Analysis: Supply vs. Demand

In Table 52 below, we estimated the gap between supply and demand for both savings and credit services. It is clear that the gap is quite large.
Table 52- Gap between supply and demand

Supply
Savings services Credit services nil 1.1 million kina
Demand
8.6 million kina 4.23 million kina
Gap
8.60 million kina 3.13 million kina
Conclusion: The potential demand for savings will be 8.6 million kina, while loan demand will be around 3 million kina. Based on our financial modeling, where a microfinance institution in NCD should have a client outreach of at least 4,000 people and a loan portfolio of at least 1.5 million kina to break even, we can therefore conclude that the demand is large enough to justify the establishment of a microfinance programme in NCD.
(p) Summary of market analysis:

It is clear that there is a strong demand for savings services. The survey revealed that more than half of people are saving up money to meet their basic survival needs. They all like to save money for school fees, to save for the rainy day, and mainly to cover basic common household needs. Amounts of savings deposits per household will be generally small, but could amount to millions of kina if thousands of households are saving regularly. More than half of all people have developed saving habits, but they are looking for a safe and convenient way to save.
+
- &$3
"99 ++) 4
Page 140
-----------------------------------------------
There is also demand for credit, but such demand is high in some places (among certain ethnic groups) and lower in other groups / places. Meeting common household needs, paying for school fees, and financing small IGAs would be the most common uses of credit. There are a few people who want to borrow to improve their small businesses. Loan sizes required will be generally small, and loan terms short. The demand for loans in NCD from local microentrepreneurs is now strong and palpable and the demand will continue to increase rapidly in the next few years due to flourishing trade in fresh food products. The high cost of imported foodstuff in NCD and the lower real purchasing power of the NCD population (due to lower real wages) have forced consumers to turn to local food in local markets. This in turn sparked the development of more fresh food production from within NCD94 and the surrounding areas, i.e. the Central Province, and the rise of more microentrepreneurs involved in fresh food production, transport, wholesaling and retailing.95 The demand for insurance is not clear, given the functional wantok system of helping each other; hence this matter requires some deeper analysis in the future. The potential demand for savings will be 8.6 million kina, while loan demand will be around 3 million kina. The demand is large enough to justify the establishment of a microfinance programme in NCD even based on these conservative estimates.
3
(a) Lessons from past microfinance experiences in PNG
A review of literature reveals that some microfinance methodologies and approaches have been tried in PNG, with varying levels of results; many of which have failed but a few have shown good results. After reviewing the literature, we can summarize some lessons from the previous experiences; see below. There are number useful lessons that we can draw from the Liklik Dinau experience. It adopted the Grameen Bank approach of Bangladesh, which is heavily a credit-driven approach. The Liklik Dinau Abitore Trust (LLD) was the main Grameen replicator in PNG which was sponsored by the UNDP. It established branches in Goroka and Kainantu. At its peak, the Goroka branch had 670 members, organized into 34 centers or groups. Loan
+!
'
+%
6 :
= : 7 -
. 8=
= = -
- ; =
- )/H = ; =
; -
$ . -
C : * -
- -C
: : "#$C : - - : -- -
: : : .
= ::
< -
Page 141
----------------------------------------------disbursals reached 201,996 kina, with a poor recovery rate of 71%.96 It relied on group peer pressure to enforce collection. Repayment plunged badly in 1998-1999; repeat loans was low; 48% of all repeat loans are defaulting; and portfolio-at-risk ratios of higher than 50%. We can draw at least 8 main lessons: 8 22$ 6 . = E . :- : . F :6 -G '
- . = : : -
. . C 6 = = ( :/H
C =/// ; F 7 *
* - ; G= 8
= %/ ; = C = = :- : :- 6
= // ; : ; "9
; : . . C 1 : 6 = 8
- ; !8 9 . % ' %8 - : - 22$ : ; C 22$ . )8 B : : ; = 22$ : &
: =
= . &
+
=:
- /H ( .
7 //H (
8 '
++!= 22$ :
* -
. ;
- 22$ : . . =
-= ; -@
; ;
It seems that the means-testing used by LLD was defective or poorly implemented because while it was trying to find the poorest people in the community, an AusAID review conducted in 1998 revealed that borrowers were from the wealthiest segment of the village society in Goroka. The lesson we can draw here is that client selection should be properly done to ensure that the programme works with the intended target groups. The peer pressure does not work well if the members are better off wealthy households who have the means, connections and financial resources. In 1998 1999, LLD suffered a series of liquidity problems, and government and donors was forced to give it some temporary subsidies to keep it going. LLD suspended releases of all kinds of loans, and it led to a very sudden drop in repayment by the clients. The clients have lost confidence on LLD, and they perceived that LLD will not be an ongoing financial institution.
+)
$ ,
K -= &$3
# . := ///
= &$3
. :
"9= &
++
Page 142
-----------------------------------------------
We can also safely conclude that the Grameen approach can not be transplanted to PNG without some kind of major modification; one has to consider the culture, needs and behavior of people here. The Rural Development Bank (RDB) was a government-owned financial institution that provided small personal loans, mini loans, which can be accessed by small businesses. Maximum loan size is 2,000 kina and interest was set at 10% per annum. It relied heavily on government budgetary allocation and did not collect or intermediate savings of any kind. Due to its poor performance, the RDB was effectively dissolved in 1998, with its residual assets absorbed by the PNGBC.98 We can draw 2 lessons from the RDB experience, as follows: (1) the interest rate set was too low (10% pa) which precluded any possibility of RDB becoming sustainable; (2) It was viewed by borrowers as an extension of government and people believe that RDBs loan money is free money, not to be repaid back. The Papua New Guinea Banking Corporation (PNGBC) collaborated with the several government agencies in 1999 to extend credit to small businesses. It financed 35 projects, with an average loan size of K27,813. The result was not good, with the default rate of 45%. Analysis showed there was poor risk appraisal and poor monitoring of the financed projects. On the savings side, the PNGBC has an impressive performance. In 1999, it had 200,000 passbook accounts, with an average balance of 371 kina. This saving facility has no minimum balance requirements and its simple procedures make it an ideal saving facility for small savers. The Savings and Loan Societies (SLS) today provide some concrete lessons and insights on how microfinance institutions can thrive and survive in the PNG environment. The SLS are registered under the PNG Savings and Loan Societies Act and most are affiliated with the PNG Federation of Savings and Loan Societies (FESALOS), a voluntary organization formed by the individual SLS and hosted by the BPNG. The sector suffered serious problems in mid-1970s up to 1990s, when mismanagement, lack of accounting and internal controls, inappropriate lending policies, abuse of authority and misuse of funds became apparent. Out of the 165 SLS, only 21 are active today due to these kinds of problems. In 2000, the BPNG launched a revitalization programme that centered on provision of technical assistance to the remaining SLS. It included efforts to develop standard policies, procedures, internal controls and adequate training of staff. It introduced tighter accounting and controls, to prevent the abuses of the past. The BPNG also installed a common computerized accounting system (called FACTS Funds Accounting Control Transaction System) among the SLS which vastly improved the SLS management systems. The remaining SLSs have gained strength and resilience, and they offer simple savings and credit services to thousands. The average savings balance of SLS members is even higher than the average savings balance of PNGBC savers, which reflects the amount of trust reposed on them by their members. One of the successful examples of the SLS is the East New Britain SLS, which has a membership base of 26,000 people; see Box B-1 below. One of the key features behind the SLS success is the simple credit procedure. All loans are extended to the maximum savings account balance of the member. Hence, if one has 200 kina in his savings account, he can borrow up to 200 kina only. This has led to very low loan losses and there is no need for complicated loan appraisal procedures. (There is some
+
$3
// C
Page 143
----------------------------------------------flexibility in the system, where the BPNG allow SLS to extend higher loan to highly qualified and dependable clients, say at a 1:2 ratio) Due to the simple procedure, it leads to high staff productivity; for example, the productivity of the ENBSLS Loan Officers is quite high, averaging 700 loans. Loan losses are marginal, with portfolio-at-risk ratio below 1%. There are no restrictive client selection criteria. SLSs depend on fee-based income too. For example, new members pay a Joining Fee of 1 kina, and on the credit side, SLS charge a processing fee ranging from 5 to 25 kina, according to the loan amount. Loan size can range from 100 kina to 10,000 kina. Loan terms vary from 3 months to 5 years. Applications are processed in a quick, simple way, and approved at the SLS head office. Borrowers get their loan money quickly. Repayment is very good; portfolio at risk is marginal. The ENBSLS board has a well composed profile and management staff is good. Financial statements of SLSs are audited regularly, and they have to report to BPNG regularly. The BPNG closely monitors their operations and sends examiners also periodically. As a whole, the SLS sector is making profits, highly liquid, and almost one-third of SLS assets are held in government securities, banks and in safe investments, which provide them a constant source of income. The Kiunga Village Finance in Western Province was formerly a branch of the closed Village Finance Ltd.99 Kiunga Village Finance (KVL) was purchased by Ok Tedi Mining Company in 2002 and it now operates as an NGO under the Ok Tedi Development Foundation. It has a successful savings programme, where it has now 6,000 savers. It offers varied yet simple savings accounts: personal passbook account, school fee savings scheme, the school children savings accounts, time deposits, etc. It has mobilized 1 million kina in just one year of operations, which is quite impressive.
Box B-1 The East New Britain Savings and Loan Society
- , L . 0 B 2 .
99
. 2 - = : - )=/// ' )< = 1 . = . = H : # - . :; = 2 . .
" :3
7,"3 2 8 B = := : = #B 1 ( ( : ; .
: ; = B = 0 F
2 ,
: . = .
; : - - B 5 = .
B " :3 B = : ; : . . . :- = G :;
= : : : 3 - ?'2 : "93#
,"3 2 .
- ?
'
2 7?'28 : = "93# * -
: ; 6 ?'2
- 9 '
; ?'2 :
- "#$ // C -
Page 144
----------------------------------------------- = * : = 2 C -
Kiunga Village Finance has a computerized accounting system, which it purchased from an Australian firm. KVL operates credit using a modified Grameen approach, but it has been having serious problems. Loan default rate is now at more than 23%, and gradually deteriorating. An analysis attributed this poor performance to: poor repayment culture, overly large loan sizes, and over-saturation of the economic activity where most of the clients operate. Currently it receives financial support from the Ok Tedi Mining company. KVL aims to attain 100% OSS by June 2004, although this is now in doubt due to serious loan problems.
(b) Most important lesson on lending

Regarding the low loan uptake in LLD, an external analyst (with whom we agree) commented that people in PNG are not really in a hurry to get another loan unlike in Bangladesh where resources and opportunities are scarce, and peoples survival depends on access to resources. In contrast, people in PNG are more laid-back, given the bountiful natural resources around, especially in rural villages. Papua New Guineans are not really dying of hunger; the wantok system of helping each other is strong and comes handy whenever a major financial need arises. Hence there is no urgent need among members to borrow again and again. Therefore, the Grameen model of conditioning future new loans on current good repayment is not applicable in this country. This is probably the main reason why the LLD programme failed and why Kiunga Village Finance (Grameen-based) is having problems with its loan program, in spite of the lessons learned from LLD and VF. This is an important lesson to bear in mind.
(c) Summary of lessons learned:

& = 9 & . - . & 1 # . . C . & ' 6 . D . C &. B ; 3 C . = : . . . - : . Page 145 : C . : 79 C . = . C % C C . . . = 8 * - . = B = - . = = 9 . ; = 1 C . C : - : C C
---------------------------------------------- C 4 & 1 1 ; . 1 : 6 . C = . . 1 ;= 1 : = C : * 6 ; C . -
We used a number of methods to collect information, including document review, review of secondary data, interviews with key informants, observation of GBDFs operations (mainly the skills training provision), focus group discussions with small groups of potential clients and community leaders, and a microfinance sample survey. The details are discussed below: . : . = = 93$'E . : - "9 /// # =. - . 6 6 = 5 : 5 93$'= . = 5 . = . = & &B$= = 6 % : = ; = = . 5 5 . : 7 = = & &B$8= =
C ( -
- .
6 -
- : / 0 = - = = 9 = 3 "9 = "9( = - = = - ; > . : - /; . :
: ;
Table 53 List of people / key informants interviewed

Listed in alphabetical order
Name of respondent
1 2 3 4 5 6 7 8 9 10 11 12 13
Abraham Gideon Alois Andrew Crompton Andrew Kadeulo Anna Nepa Anthony dela Cruz Arere Daroa Betty Keria Bill Sagir, PhD Cannis Boagege Cathy Amos Chris Mota Christina Kapi
$ !% $ !&% ' ( ) ! + ! *,-. % !/ $ !0 1 !* ' 2 !% $ !4 0 $ ! 4130 5 3(* 6 !2 ) ! 73(* 5 1 !2 5 ) )'-! 3 % + 1 ! %$$ % !+ 8, %
!*
! %$$
Page 146
----------------------------------------------14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 61 62 63 64 65 66 67 68 69
Christina Kepori David Conn David Kelso David Lakatani Dia Nao Diane Toviliran Ebore Morea Elizabeth Gima Elvis Kamba Emily David Essie Koriel Executive Director Fr Albert Lenon, Francis Tangu Fred Ugwasola Gabriel Iso Gari Gari Charlie Garima Tongia Gary MacPearson George Mosinakave Gove Henry Ameau Huha Aiva Igo Morea Jackson Gevi Jeff Prime Joe Bepa John Ako John Kaa John Oli John Varey John W atpalin Kaing Yateng KanukTae Karen Kaua Aia Ken Andrew Koi Lady Carol Kidu Larry George Lasaka Apitu Leni Liyanage Leonard Sabadi Leonie Heter Luke Pulango Mabel Gavera. Manu Kenake Margaret Korai Martin Lipen Manda Mary Ipay Matthew Berry Matthew Tangu Meria Gavera Michael Ostrowski
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
Page 147
----------------------------------------------70 71 72 73 74 75 76 77 78 79 80 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Michel Mugasso. Mike Manning Nick Tilla Para Kekeno Pastor Kali Bagi Patricia Kidu Peru Koma Peter Koipa Peter Komona Priscilla Sariman Rarua Gavera Raymond Vingian Renni Ebore Rex W amp Roy Mandawa Sabine Spohn Saki Peter Saliya Ranasinghe Sangu Morris Sister Elma Tuzon Sister Lucy Camiring Sose Tamarua Stanis Aipe Sydney Yates Tanya Gisai Thomas Harai Thomas Uu Topo Aipe Various persons (11) Wacksy Kenos
$ $ / ) 3 2 $ * /
!6 !' !0 $
+ ( !% 2 ) < !2 !+ ) % $
! ! !2 $-$! 2 $-$ $ 5 9 6 !
*,-.
$ !4 + !, % : !4 0 ! 73(* 2 ! 73(* + 2 ! %$$# 3(* )-, % 3 33% ! 73(* 3 2 ! %$$ $ 2 !% $ !&% 2 = 2 ! 2 = 2 ! * 2 ! 73(* % !; . 6 5 9 * $ !% $ !&% : $ !$ 5 !0 !, 2 ! 73(* % !&% $ !,
: . . .
: = ' ( = 5 = // = C7 = : + =
= " -> = " C %! : ; 7'9$ 8 : -
-: . 9 .
93$' . =
C . : : - +/ &
: -
6 &8 -
. - : "#$ .
Table 54 - List of places visited by consultants

(Excluding the areas visited by the survey teams)
Name of place
1 2 3 4 5 6 7 Kira-kira village, Pari village Doru village Gimawnia village Badili settlement Gorobe, MS Hanuabada village
Significance
Meet with village leaders; see homes and businesses of Koita tribe people; see homes and businesses of Pari people who like to live on the coasts; see homes and businesses of Doru tribe people; originally from Kerema see homes and businesses of Koita tribe people; see homes and businesses of setllers living in this legalized settlement area see homes and businesses of target potential clients; see homes and businesses of target potential clients
Page 148
----------------------------------------------8 9 10 11 12 13 Vabukori village Kaugere settlement Erima settlement Morata settlement 8 Mile settlement Korobesea Meet with key community leaders; see businesses of target potential clients Meet with community leaders, see businesses of target potential clients Meet with community elders; Meet community leaders and see businesses of target potential clients Meet with community leaders and see businesses of target potential clients Visit the St Jospeh Sisters Training Center
#*0
We prepared a draft or indicative TOR for the Microfinance Technical Adviser. It is written in matrix form below, for easier reading.
Table 55 - Indicative TOR for the MTA

Phase Pre-operation phase
(paid time =4 months) Objective: To prepare for the launch of the GSLS, and conduct all preparatory activities during first 4 months
: > ;: . =
- : -9 2 = 93$' - &$3 5 C . F . - G = = = : = . C = . = A. B ; = 8 B C = 1 7 = # = # . . : C .
# . =
A .
$ $ ( $ $
C ; = . - 93$' - $9 - 2 C Page 149 C - $9 3 : - - 3 "9C . C
= = . -
. * = 6 : ;
Foundation
phase
(paid time=15 months) To establish the SLS and operate it during the first 18
& ( 4 '
----------------------------------------------months of operations;
9 , 4 -
C 9 2 . C &$3 = : ; = 93$'= & &B$ . : C = - C C ; &$3 : ; C-
. > ;: > ;: - # : - - & &B$ - : - * , C
Stabilization
phase
(paid time=9 months) To operate and stabilize SLS; run the SLS for 12 more months; at the end of that year, turn-over to DGM,
> ;: > ;: - $ . $ # & 4 9 $ . . 6 # : . : - & &B$ = . . = -= : F 6 . . : - -
9 2 . C A &$3 . 9 G . . 6 =
= 93$'= & &B$ . . : - $9 = : - $9 C = :- 6 : - &$3
&$3
C & &B$
Exit phase
(paid time=2 months) To guide the DGM and management staff for 3 more months before leaving finally
: -= &$3 . & &B$
2
Askim-Fom namba: Questionnaire Number:
Microfinance Survey in Port Moresby

4 =" ; PPP7 ; . ; 8 $ Q !% ; ;: ; : ; ;; : ; : ;; : ;@ $
Hello, I am. (introduce yourself). We are conducting a short survey to determine the savings and borrowing needs of people here in Port Moresby. Do you have some spare time now? Can I interview you for about 45 minutes?
Page 150
----------------------------------------------RESPONDEN INFOMASEN RESPONDENT INFORMATION [ ] Meri [ ] Man " " [ ] Female [ ] Male [ ] Igat IGA [ ] Nogat IGA #- ; [ ] With IGA [ ] without IGA A Tribe/province: Ethnic grouping: $ $ A 0 & ; 0 ' 0
$ $ #
# 0 & ; ' & ; 0 ' 0
Nem blong Electorate: Area: [ ] south [ ] north-east [ ] north-west Setelmen Ples: Specific location / settlement:
#- ;
****** Gather basic socio-economic data about household: ****** Kisim socio-economic data na infomasen 1. Asikim: Ask: First name of respondent: Nambawan Nem blong responden: Meri or man: [ ]meri [ ] man Gender: [ ] female [ ] male Hamas Christmas: Age:
Education: Educational attainment? Province we yu bon? Province where you originated? Tribe/Clan/province: Ethnic group Tok ples: Language [Mother tongue]:
Civil status: [ ] married [ ] single [ ] divorced or separated [ ] widow Namba long ol Number of children:
Kain haus Housing: [ ] high quality [ ]moderate [ ] poor
****** Kain wok or bisnis blong responden ******** ****** Occupation or business of respondent ******* 2. Nau yet yu wok or nogat? Are you currently employed? 3. Wanem kain wei yupela wokim long kisim mani? How do you earn your household income? 4. Nau yet wanem kain wok or business yupela wokim? What is your [wife or husband or both] occupation or business? ****** Pasin blong lukautim mani ******* ****** Saving behavior ******** 5. Yu save long lukautim mani? Do you save money? 6. Yu save putim mani blong yu long wanem hap? [ ] insait long tin box long haus [ ] long bank [ ] insait long credit union or cooperative [ ] long wanpela church-based savings scheme [ ] sande-sande or long [ ] narapela hap Where do you put your savings? [ ] Tin box at home [ ] in a local bank [ ] in a credit union or cooperative [ ] in a church-based savings scheme [ ] sande-sande [ ] others
Page 151
----------------------------------------------7. [Sapos answer long Question #5 na #6 em Yes], why na yu putim yet mani long dispela hap? [Applicable if the answer to5 & 6 is Yes] Why do you put your savings in this place?
8. I luk olsem yu no savim mani olgeta taim insait long bank or long kredit union. Wanem as tingting na yupela ino laik putim mani long Bank? It seems that you are not saving regularly in a local bank or credit union. What are the reasons why you dont save in a bank or a credit union? 9. Yu yet inap savim sampela bikpela samting olsem pik, kakaruk, or ol narapela haus salim behain taim? Do you save in the form of assets (pigs, chicken, jewelry, household items, etc.)? save? samting we igat bikpela mani long . If yes, in what form do you
10. Yu save savim liklik mani olgeta taim or nogat? Sapos nogat, wanem as tingting long dispela? Do you save money regularly? If not, why? 11. Wanem as tingting blong yu long savim mani? Why do you save money? 12. Sapos yu gat sans long putim mani olgeta taim long wanwan day long wanpela sef ples klostu, hamas yu ting bai yu savim long wanwan week? If you have a daily opportunity to put your money in a nearby safe place, how much money can you save each week? (Minimum estimate only) ****** Tokout long ol saving sevis long communiti ******* ****** Identify existing providers of savings services in the community ***** 13. Long dispela taim inap yupela tokout long wanwan man meri or group husait inap go pas long givim sevis long savim mani long ol wokman meri we with low-income earnin Do you know of some persons or institutions which provide savings services to lowincome people in this community or settlement? . Which are they?
14. Yu yet I kisim sampela halpim long dipela ol sevis? long dispela? Do you use their savings services? If not, why? ****** Way blong kisim dinau ****** ****** Borrowing behavior ******** 15. Yu ting yu luksave long nid long borrow mani? Do you see the need to borrow money?
Sapos nogat, wanem as
16. Do you know of some persons or institutions which provide loans to low-income people in this community or settlement? . Which are they? 17. Long husait na wanem hap tru bai yupela kisim mani? [ ] long ol famili memba na wantoks [ ] ol frens blong mi yet long opis, skul or wokples [ ] long liklik trade store [ ] long bank [ ] long credit union or cooperative [ ] or long church-based financial scheme [ ] from a charity or NGO From whom or from where do you borrow money? [ ] from my relatives and wantoks [ ] from my friends in office, school or workplace
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----------------------------------------------[ ] from a local trade store [ ] from a local bank [ ] from a credit union or cooperative [ ] from a church-based financial scheme [ ] from a charity or NGO [ ] from local money lenders [ ] from financing companies or money shops [ ] others Tok klia liklik long way yu kisim dinau Describe a bit your credit source 18. Blong wanem as tru yu save kisim dinau mani? For what purpose do you usually borrow money? 19. Hamas tru yu bin kisim long last dinau? How much (loan) did you get in the last time you borrowed money?
20. Dispela dinau, yu baim ol bek pinis? Sapos nogat, wanem as tru na yu nonap bekim hariap? Have you fully paid back the loan? If not, why? 21. [Askim Question #21 sapos Informant I stap wokim business] Yu ting behain taim bai yu kisim sampla lon long wok kirapim sais bisnis blong yu? . Sapos wok igo het yet, hamas yu ting bai yu kisim? [Ask only if the Informant is engaged in a business activity] Do you need some loans to improve or increase size of your business? . If so, how much loan do you think you need? 22. Hamas taim yu dinau long wanpela year How many times do you borrow money in a years time? 23. [Askim Q #23 sapos Informan ansa [Ask only if the Informants answer to Question #16 is Yes] Do you borrow from a local bank or credit union? why? 24. Do you borrow from moneylenders or finance companies? loan did you get last time? . If not, why? . If yes, how much
. If not,
****** Way blong risk management ******* ****** Risk-management behavior ******** 25. Sapos igat bikpela hevy kamap olsem wanpela long family I sik or die, how bai yu kisim helpim hariap long sapot long mani? How do you handle sudden large financial needs, or a costly hospitalization? 26. Sapos wanpela I dai long family blong yu, how bai yu kisim helpim long payim ol How do you fund funeral expenses if there is a death in the family? 27. Tok klia sapos yu wapela memba long wanpela group we ol I save givim helpim long family memba. Sapos yes, explainim answer long Question #28. Are you a member of a group that provides financial assistance in case of death in the family? If yes, provide appropriate answer to Question #28. 28. Explainim sapos yu save kisim helpim long sampela group olsem local church, or a government agency, NGO or a charity long cases we bikpela emergency I kamap long familty? Sapos yes, tok klia long husait tru em iken givim yu dispela kain helpim. Do you get some financial assistance from the local church, or a government agency NGO or a charity in cases of major family emergencies? If yes, which provides assistance to you? Describe briefly: taim blong die long wanpela expenses?
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----------------------------------------------29. Em nau yumi kamap long pinis blong dipela toktok blong yumi. I gat sampela toktok or askim yupela laik tokout or askim? . Sapo dispela em tru, If so, what are they
This is the end of our interview. Do you have some comments or question? what are they? *** Talk tenk yu long responden. *** Thank the respondent.
. If so,
& #
TERMS OF REFERENCE FOR A SHORT TERM CONSULTANCY MISSION FOR Ginigoada (AUSAID FUNDING)
I. INTRODUCTION AND BACKGROUND
Ginigoada Bisnis Development Foundation Inc (GBDF) is a non-profit community development oriented organisation providing Microenterprise and skills development training to disadvantaged persons within the Moresby South area with the aim of improving income generating opportunities for its target participants. AusAID has funded a two-year pilot project with this pilot phase coming to an end in June 2003. The overall goal is to improve income-generating opportunities for disadvantaged families and individuals within the National Capital District with initial piloting in Moresby South area. The long-term purpose is to establish an appropriate and efficient urban Microenterprise programme including Microfinance services and business skills development programmes. It is the longterm aim to provide these essential services in the most sustainable manner, ideally totally free from donor subsidies. The initial plan was for Ginigoada to provide enterprise development training and to partner with an existing MFI which would provide financial services. However, the MFI in question went out of business and a suitable replacement could not be found. Since then much discussions and thoughts from board and assessments from AusAIDs Kieran Donoghue (AusAID Canberra Microfinance Expert) had occurred to determine whether or not Ginigoada itself should enter the microfinance business and if so whether it should continue to provide non-financial business development services. An important determining factor had been, how does Ginigoada become financially and operationally self sustainable in providing these services while continuing to increase its outreach and impact those it is set up to serve. The decision to enter the Microfinance world had been a slow and steady build up for board and management because of the obvious risks involved and the technical expertise and experiences needed to properly set one up. The search to determine the viability, products and delivery mechanisms has been an ongoing exercise and continues to be so with the current commissioning of this feasibility study. This study is also a direct result of a project review recently conducted by Kieran Donoghue as part of the two year pilot project review to determine GBDFs future directions. Kieran Donaghues report was discussed in a meeting on 7/5/3. It was decided between AusAid and the chairman of the board that a full feasibility study will have to be carried out prior to the recruitment of an international micro-finance practitioner. II. PROBLEMS TO BE ADDRESSED AND SCOPE OF WORK a. Main problems
The geographical area to be covered by this study will be the Moresby South area and the National Capital District in general. The target area of Moresby South is the largest mixture of squatter settlements and traditional villages in the National Capital District. The Moresby South population is about 150,000 with 80% of this population being either settlement dwellers or villagers. The remaining 20% are suburban dwellers, often involved with the formal sector. Approximately 80% of the 120,000 settlers/dwellers are dependent on the informal sector for their livelihood, i.e approximately 96,000. Currently the majority of microenterprise activity is one form or another of vending/street marketing. There are a small percentage of service activities and a small number of fishermen. A relatively high population density and a fast growing population with a growth rate of 4.7% pa over 2.4% higher than the National average. Limited access to resources, i.e do not have access to land, which means that the traditional forms of
Page 154
----------------------------------------------subsistence agriculture are not possible. Families therefore are dependent on income generation in one form or another to survive. The relatively high cost of living and high unemployment has resulted in many of the settlement dwellers living in deprived living conditions with poor access to health and educational services. A relatively mobile population with a related breakdown in traditional support and control structures hence the ability of the extended family to support those in needs has also weakened in the settlement areas. It is for these developmental needs that Ginigoada has come to existence. To date Ginigoada has trained up to 223 participants in its business awareness and planning courses and 69 participants in its Skills development courses. Approximately 20 % of those trained are into some form of income generating activity ranging from street vending, sewing, baking, fishing and small trade stores. b. Scope of work
The purpose of the consultancy is to conduct a full feasibility study on the start-up and functioning of an MFI. The Mission will in particular make detailed recommendations on the conditions for operating a cost covering MFI in an area integrating Ginigoada target zone but not limited to it. The mission will analyse the feasibility of: 1. Establishing an MFI to be integrated in the ADB Microfinance and Employment Project. 2. Establishing the MFI under the GBDF authority and mandate or alternate institutional arrangements. The mission will need to survey potential micro-finance clients and meet all the relevant operators of the economic sectors and any relevant organisations (private or public) to collect sufficient quantitative and qualitative information in order to analyse the local economy and the micro-business opportunities in particular. The results of this mission will be key inputs for the final version of the first business plan of the MFI, assuming it goes ahead. III. STUDY RESULTS
The Mission will study in particular the following items: a) b) c) d) Survey the market and determine whether market conditions are such that a microfinance organisation would have a reasonable chance of success. If the answer to (a) is positive, make recommendations on priorities for the type of clientele, services and the areas to be served. Advise on the organisational and management structure of the MFI (management, staff profile, branches structure etc) and relationship with GBDFs present structure; recommend any measures necessary in order to ensure that financial and non-financial services are sufficiently separated (e.g. separate or same premises etc). Advice on the legal and ownership structures of the future MFI (bearing in mind in particular the desirability of the MFI being able to mobilise deposits) and analyse the necessary institutional adjustments required to establish the MFI within GBDF or alternative institutional arrangements. Propose a business strategy for the MFI and make financial projections for a period of five years, ensuring that all assumptions are made explicit. Prepare a yearly budget showing the external funding required for implementing the business strategy for a period of five years. Recommend a saving and lending policy: lending methodology and mechanisms for disbursing and repaying loans, savings products to propose. Specify the pricing of any products proposed by the MFI (interest regimes, establishment fees, etc). Assess the need for external technical assistance during the early stages of implementation. Analyse the conditions of the institutional and financial sustainability of an MFI in the given set of constraints and make the necessary recommendations to achieve these objectives.
e) f) g) h) i) j)
The Domestic Consultant will perform the following tasks: (as per TOR for the Domestic Consultant) a) b) c) d) e) f) g) h) i) j) Together with the International Consultant (IC), plan details of tasks and survey activites; Review, edit and improve the draft survey tool / instrument; and finalize the survey tool, in English, together with the IC; then translate the survey tool into pidgin; Work with Ginigoada and the IC in preparing a simple sampling plan, and then select sample areas / households. If necessary, collect data to ensure a good sample frame. Prepare and conduct a short (4 hour) seminar to train 6 enumerators or Data Collectors; explaining the purposes, contents and meaning of the survey tool; with emphasis on how to properly conduct field interviews; Directly supervise all or some of the Data Collectors; ensuring that the sample mix is followed, and that the sample areas are covered adequately as per sampling plan. Collect, proofread and correct the completed questionnaires; Process the data; prepare simple tables (cross-tabulations) as agreed with the IC; Write a short simple report containing the results of the survey; including all tables (cross tabulations); then submit the report in hard and soft copy to the IC as per agreed timetable. Conduct key informant interviews in the assigned communities /areas. Write a simple summary of the information gathered from key informant interviews and submit to IC in hard and soft copies;
Page 155
----------------------------------------------k) l) IV. Assist the IC in proofreading and editing the full draft report; Attend and provide assistance to the IC during the Debriefing Session.
AVAILABLE DOCUMENTATION
Ginigoada will make all its documentation available for consultation during the study and in particular the following documents: 1. 2. 3. 4. 5. 6. 7. 8. V. The initial project design document (detailing the needs of the target community and how the project design has reflected these needs) Project Review Reports by Kieran (thus far two studies) Microfinance Proposal submitted to AusAID Impact Study Assessments conducted by Ginigoada (thus far two studies) Training Reports Constitution of GBDF Follow up Meeting Reports Other Reports as deemed necessary
PLAN OF WORK
The mission will work in Port Moresby and organise their activities independently. The consultants will acquaint themselves with the relevant legislation and status governing the establishment and operation of financial institutions in PNG and with Ginigoada present programmes. The mission will meet the board chairman and members, AusAid representatives and any other government agencies specified by them prior starting to carry out the study in the field. VI. SERVICES AND FACILITIES
The Ginigoada office in Port Moresby will provide the necessary services and facilities to conduct the study, namely: liaison, logistics (vehicle with driver), travel arrangements plus fax / telephone to communicate with the MCC. Ginigoada will assist the consultant in meeting officials in the area of its programme. VII. EXPERTISE REQUIRED The Mission will be composed of one international consultant with practical experience in micro-finance assisted by one (or more) local consultant(s). The PNG-ADB Micro-finance Project (called the Micro-finance Competence Centre or MCC in other part of this document) will supervise the study. The consultants will report to the International Consultant/Team Leader of the PNG-ADB Micro-finance Project. The mission will be undertaken by an international consultant with a strong practical experience in various fields of micro-finance particularly in designing and conducting survey and feasibility study. The international consultant will be assisted by a local consultant for conducting a field survey. The local consultant(s) will have either a background in micro-finance, marketing or in sociology with a specialisation in conducting field surveys. VIII. REPORTING The report will be submitted by the MCC to Australian Aid Agency (AusAid) in Port Moresby and the GBDF Board (3 hardcopies copies plus the report and its annexes in electronic form). At the end of the fieldwork the consultants will hold a debriefing session to discuss their preliminary findings with the Ginigoada board, AusAID, the MCC and any other parties that they might invite. AusAid will be responsible for organising this meeting. IX. INPUTS
The contract will be in the form of a service contract between the consultant and the MCC. The MCC will supervise the study and the training session. The total input of the international consultant (including reports writing) will be 35 days and the local consultant 15 days. COMPLETE TIMETABLE OF MISSION International Consultant I. FEASIBILITY STUDY Travelling days (in/out of PNG) Field Study (including drafting first draft) Finalisation of report after presentation to client). TOTAL 2 days 31 days 2 days 35 days Local Consultant
15 days
Page 156
-----------------------------------------------
Table 56 - Basic office and fieldwork equipment needed

064" "07 !" # 40 8 ;" "< ;! =4# >"="80 ?2 @+A 2 - B . 9 > :9 *),)))()) 0# 8 4 #0 0 8 "9: 4="80 ?2 : -; ; @+A )=) / // %/=/// // % =/%/ // %/=/// // . ,)1)()) =!// // =%// // = / // %// // = %% // !// // %!/ // ))/ // /! // )// // / / % =))) ) =%// // %/ // %/ // ! / // // // // / // !/ // * ,+&*(&+&&,'+*(&9: 0 8 07 :8 0 !/=/// // 8 ( :8 0 9: 0 8 0
!/=/// //
" :#8 0:#" 8! "9: 4="80 ?2 @+A ? & 7 4 8 $ ; # #$ > ( : R> : S ( 6 D KB $ . %/ D 3 D 3 ;= %) 3 # 4 A2 & " : ;7 : -4 ( 8 B = : 7 : -4 '&# B ; ; #,6 . ( ( #' # # 0 " "9: 4="80 ? < - B . A
=!// // =%// // != ! // %// // = %% // !// // / // ))/ // % // // // / // / // =))) ) =%// // %/ // %/ // !/ // // // // / // !/ //
! )
%=/// // A 8
%=/// // 1,)))()) / / //
0# 8 4 #0 0 8 "9: 4="80 ? < ; ;7 93$' 1
/ //
Page 157
----------------------------------------------; ; A / // / // != ! // %// // = %% // !// // / // ))/ // % // // // %%/ // / // =))) ) =%// // %/ // %/ // !/ // // // // / // / // / // =!) // %// // = %% // !// // / // =+ / // =/%) // +// // %%/ // / // =))) ) =/// // %/ // %/ // ! / // // // // / // ',+-'(&.-,+-'(&#C ? = # : C =- 4 ( %/=/// // %/=/// // 1),)))())
" :#8 0:#" 8! "9: 4="80 ? < ? 7 :8 & 7 4 87 :8 $ ; # 7 :8 #$ > ( : R> : S ( 67 :8 D KB $ . %/ D 3 D 3 ;= %) 3 # 4 A2 & " : ; B = : '&# B ; ; #,6 . ( ( #' 7 . 8 # 0 " 9 9 & ;" 2 0 . . @'A
=D
"< ;! =4# >"="80 ?2 - B . 9 > :9 -
!/=/// //
!/=/// //
*),)))()) 0# 8 4 #0 0 8 "9: 4="80 ?2 : -; ;= @'A )=) / // %/=/// // ! )=!!/ // %/=/// // -&,**)())
" :#8 0:#" 8! "9: 4="80 ?2 ? & 7 4 8 $ ; # #$ > ( : R> : S ( 6
@'A =!// // =%// // != ! // %// // = %% // !// // =!// // =%// // = / // %// // = %% // !// //
Page 158
----------------------------------------------D KB $ . %/ D 3 D 3 ;= %) 3 # 4 A2 & " : ; B = '&# B ; ; #,6 . ( ( #' # 2#$ 5 7 - 6 7 9 / // ))/ // % // // // // // %/ // =))) ) =%// // %/ // %/ // !/ // // // // / // =/// // %=/// // % // %!/ // ))/ // /! // )// // // // %/ // =))) ) =%// // %/ // %/ // ! / // // // // / // =/// // %=/// // != %/ // &),.1*(&+--,'/*(&-
- 8 - 8 0
Page 159
-----------------------------------------------
!!
These are some basic suggestions regarding training, which GBDF may consider. The GBDF conducts two kinds of training; a) business skills training, b) trade skills training. During a one year period (2002-2003), GBDF has conducted a total of 17 trade skills courses dealing in topics like cooking, baking, carpentry, welding, screen printing, etc. A total of 235 people attended such trade skills training, averaging 14 people in each course. On the other hand, GBDF has conducted 20 business skills training courses, where 272 people attended, averaging 14 people per course. They are essentially the same people, where the 235 people attending the trade courses came from the 272 people who finished the business course. In terms of absolute number of people assisted, it is really 272 people only. Expenses of GBDF runs at 20,000 kina per month, and if taken on a per trainee basis, the cost will be 474 kina per trainee; (this is arrived at by dividing the annualized cost of K240,000 by the sum of 235 and 272 - people who attended the courses). Hence, we can say that GBDF invested 474 kina in each trainee. One major problem being faced by GBDF is the lack of responsiveness of the current market for the kinds of training being offered. The peoples groups that GBDF is serving in Moresby South are generally not receptive to business training courses. Response from other electorates seems better. Given this, GBDF would need to open and serve other areas of NCD also. In the long run, or say after 3 years, the overall demand would fizzle out as NCD does not have a lot of entrepreneurial people. Translation of business training to actual income is low. Out of the 272 who attended the business course only 20 people actually implemented and went to business; thats only 7% of the total; one would ask what happened to the other 93%? Key informants said that the business skills training being offered by GBDF is too complex for the level of education and experience of the trainees. It is simply beyond their head to understand. The requirement to develop a business plan from new trainees after the training is also an unnecessary requirement that people anyway can not produce or could not implement. Many trainees came to the training expecting that they will get a big loan after the course; hence their objective is not really after going to business. It was better to deliver simple business skills packages; here GBDF has taken some good steps. Again, here GBDF need to seek new options on delivering training. People have remarked that people could not start business because they have no access to loans. But that is true for other peoples groups as well; they also have no access to loans. The experience here and all over the world is that poor people save up to build their small initial capital and then go to business, then they re-invest and reinvest their profits until their capital grows big. Thats the way how businesses start and grow, not by borrowing at the beginning. Starting a business with debt is dangerous, especially for an inexperienced person because if the project fails, she will have end up with failed business and a big debt. An important factor is deciding on whom to invest in. Why invest in people without any previous business experience and who does not come from entrepreneurial families or clans. Entrepreneurship is not taught in the classroom, it is caught. One can not expect a person to become an entrepreneur after attending a seminar. It is caught by observing how a business is run over many years. That is why business acumen runs in families. It is better to invest in someone who is already doing small IGAs or small business and help her improve or upscale her business because she can create employment for others. She can also train other young people under her business establishment and later on these young people can break away and become entrepreneurs themselves. If GBDF continues with its current practice of selecting clients, it is not remote that 97% of all who attended the courses will not be able to translate the training to actual businesses on the ground, which would mean 97% of the investment of GBDF will have gone to waste. It is simply not betting on the winners. One way for GBDF to increase cost-effectiveness is by reducing its cost of operations. This may be accomplished, for example, if GBDF and GSLS operate from the same office, in a lower-cost office premise, say in Gordons, and the two organizations cost-share in the office rent, power, water, vehicle maintenance, computer maintenance, etc. They can also cost-share on a few common staff like office clerks, guards, cleaners and drivers.
Page 160
----------------------------------------------Based on feedback gathered from key informants, there is a need to continue the trade skills training because (a) many people lack basic trade skills to be employed gainfully; (b) there is lack of diversification in the skills among people skills; (c) even if there some basic trade skills, there is a lack of creativity in producing new products. There seems to be good demand for these kinds of training, which can not be said for the business skills training. Given this, GBDF may consider focusing more on the trade skills training, but making sure that service delivery is cost-effective, because key informants said that there are perceptions that GBDF is not yet cost-effective in delivering the trade courses. GBDF should seek various options on service delivery. Some suggestions gathered were the following: (a) Why not collaborate with other groups or NGOS or with the DSW to offer NCD-wide trade skills courses that would be cheaper because of cost-sharing arrangements; (b) Make some courses a two-step course, meaning interested people learn the basics in step 1, then those who are really serious and interested go to step-2 which will provide more detailed training; in so doing you eliminate the not-really-serious. (c) Why not hire short-term (1 or 2 week) Master Trainers from various places, in collaboration with NCD, DSW, other NGOs, etc. especially those who can teach new trades, new crafts or how to make new products. (d) Consider setting up apprenticeship schemes or business incubator schemes where people learn on the job in companies or workshops; the apprentice can earn while he learns.
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Feasibility Report on Establishing Microfinance in Port Moresby

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Feasibility of Establishing a Microfinance Programme in Port Moresby, Papua New Guinea

Feasibility of Establishing a Microfinance Programme in Port Moresby, PNG Page 2

Feasibility of Establishing a Microfinance Programme in Port Moresby, Papua New Guinea

Organization of this report

Below is a detailed table of contents.

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Chapter 1 Market analysis

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Chapter 2 Main business strategies

Lessons Learned from Prior Microfinance Experiences

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2.2 Factors to be considered in formulating business strategies

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Table 1 Specific conditions in Port Moresby

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2.3 Recommended 9 business strategies

Table 2 - Recommended main business strategies

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See Chapter 8 Organizational Arrangements, especially sections 7.5 and 7.6

See Chapter 13 Human Resource management; see also Chapter 8 Infrastructure

See section 8.5 collaborating with existing networks and bodies;

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Chapter 3 Target groups

Table 3 - Target groups

Women belonging to established church groups - : - . - - : . Economically active people :: ; ; : : ; ; . . = = := =. . - -

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Box 2 Religions of people in NCD

3.2 Client selection criteria

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3.3 How about the poorest households?

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3.4 Target areas

Table 4 - Target areas in NCD

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4.1 Recommended microfinance methodology

Box 1 - What is a savings group?

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4.2 - Approach in forming and maintaining savings groups

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