Balancing Sustainability
with
Service to the
Poorest of the Poor
By Sharda Naidoo
By 1995, the Small Enterprise Foundation (SEF) had achieved a 97 percent repayment rate after four years of giving loans to the residents of Tzaneen, a small, rural town in South Africa. This made it one of the world's most financially successful and efficient microfinance programs, having reached a level of sustainability critical to the viability of microfinance lending.
But SEF founder John de Wit was not content with this achievement.  The SEF was not reaching the poorest of the poor, according to an impact
assessment. Rather than consolidate its gains, de Wit and the SEF embarked on a risky effort to reach beyond the ranks of the most capable poor to extend loans to the most impoverished one-third of the population through a program called the Tshomisano Credit Program (TCP).
Prior to 1995, SEF's clients were poor, but they were not among the poorest 30 percent of the poor. Its customers? business acumen and higher levels of confidence
Photo by Sharda Naidoo
were crowding out those at the margin. De Wit and his colleagues resolved that reaching the most poor was just as important as achieving high growth rates, efficiency levels, and financial sustainability.
Ten years after launching its program of lending, 68 percent of SEF's 12,500 clients are financially sustainable. Between its launch in 1991 and June 2001, the SEF disbursed some 82,000 loans valued at more than 80 million rand (US$7.86 million), and was forced to write-off only 4,162 rand (US$409).
At this point, the SEF could attain full financial sustainability by continuing to work with the less poor, according to Marielle Zeidler who has conducted in-depth studies of SEF as part of her Ph.D. research. "It would be easy for SEF to reach sustainability, but de Wit's interest is in serving the poor," she said.
Choosing the Road Less Traveled
Yvonne Radinku, CEO of Marang Financial Services, South Africa's other leading microfinance institution, holds de Wit and SEF's program in high esteem. Marang Financial Services has achieved 51 percent financial sustainability with more than 14,000 clients in the two years of its operation.
But unlike the SEF, Marang is not targeting the most poor. Its clients may have tin or zinc roofing while the SEF's poorest clients are likely to live in huts with grass roofing.
In the South African context, both de Wit and Radinku are giants in the field of microfinance – no other institution or leaders have matched their success to date. But Radinku questions the time and expense consumed by the TCP's targeting of poverty.
Photo by Connie Laas
Ms. Paulina Letsoalo, receptionist at SEF, with a walk-in client
She argues it is sufficient to reach the poor without distinguishing the level of poverty. Pursuing both poverty reduction and financial sustainability may overload a microfinance program, she warned, suggesting that reaching financial sustainability is a higher priority than targeting the most poor.
"Given the skewed situation in South Africa, isn't it sufficient to target the poor who do not have access to financial services? " Radinku asked. "I also worry about the ability of the extremely poor to set up and run businesses successfully."
The fact that SEF and Marang Financial Services are two of South Africa's leading microfinance organizations suggests there is room for both ways of operating, and that both are necessary. But de Wit clearly has chosen the more difficult route.
Applying the Grameen Model
From its launch in 1991, de Wit decided SEF would work with the rural poor. In the South African context, the label "rural" has a special significance.
South Africa's former apartheid regime stripped black South Africans of most of their economic rights and removed "surplus people" to remote, rural homelands, where
they were given limited access to land and few opportunities for business and employment. As a result, extreme poverty still blights the former homeland areas in rural South Africa.
Three homelands areas were located in the SEF?s Northern Province. De Wit decided that SEF would focus its efforts on serving the residents of these former homelands.
De Wit decided the SEF would apply the methods of Bangladesh's famous Grameen Bank to South Africa. The Grameen Bank
Photo by Connie Laas
methodology extends loans to groups of individuals so that the group members can guarantee each other's loans. De Wit found that rotating loan schemes, indigenous to South Africa (called "stokvels"), fit the Grameen model.
While providing credit is one the keys to economic empowerment, savings is important to enable the very poor to build assets. Because South Africa's laws forbid organizations like the SEF, that are not registered as banks, SEF encourages its clients to contribute regularly to Post Office savings accounts. It promotes those accounts because the Post Office is one of the few institutions with a branch network that reaches into rural areas.
"Savings is the most important service I have received from the SEF," said Florence Mahlangu, one of the SEF's most long-standing clients. "I just couldn't believe it when my group members and I had 8,000 rand (US$786) in our joint savings account."
Defining Who is Most Poor
The SEF has devised a three-step process to 1) identify the most poor, 2) give them the skills they need and empower them to successfully establish and operate businesses, and 3) measure the effectiveness of its efforts.
The SEF first tried using a method called the  Visual Indicator of Poverty test (VIP) to identify the poorest members of a community. Field workers would score the external conditions of people's houses according to a checklist.
People living in houses built from mud bricks with poor quality thatch roofs were deemed poorer than those living in houses built of cement bricks with zinc roofs. The latter did not qualify for loans under the new Tshomisano Credit Program (TCP).
However, the field staff reported that
Photo by Connie Laas
many people who felt they should qualify for loans were being excluded. The SEF then tried another methodology called Participatory Wealth Ranking (PWR). PWR allows communities to rank themselves according to their own perceptions of poverty.
Detailed discussions are held with reference groups from a community that is being evaluated. Large groups of people are asked to group cards and beans to indicate various residents' levels of poverty. The results are tested among three separate community reference groups, so they can be verified by checking consistency from one group to another.
PWR results proved to be more accurate than those generated with the VIP?s static, externally judged criteria. Because PWR made better use of in-depth local judgment and the experience of different community groups, it was deemed superior. It also provided greater transparency by involving the community in decisions about who qualifies.
Next: Motivation, Planning, Support
After the SEF identifies eligible TCP members and gives them loans, it begins a three-step process to help them evolve successful businesses and provide them with skills and empowerment. This process involves motivation, business planning, and ongoing support.
Motivation is clearly the key because the poorest of the poor often lack self-confidence and believe that credit programs are not for them. SEF field staff talk to new members to convince them that they can be successful. Members are encouraged to start thinking about the type of business they could run, or how to improve an existing business.
Beyond demonstrating by example that the poorest can have confidence and succeed, TCP members are helped to feel they belong to a group of peers who are equally poor. This is essential to maintain both a pace and space that is comfortable and safe. It gives the members a better chance to graduate to larger loans and it helps ensure that members do not leave the program.
Once motivated, members need to plan their businesses. During this stage, field staff act as group facilitators. They must ensure that all aspects of running a business are covered, but they also must be careful to see that members "own" their business plans.
This stage has proven to be challenging for the members, field staff, and the organization. Because business development is not traditionally a feature of microcredit programs, many questions must be answered by SEF staff.
Questions to be answered include: "Should the field staff be trained to be business counselors? Will the additional costs of doing this detract from the drive to create an efficient microfinance program?"
Good planning is essential when starting a business, but it is not enough to guarantee success over time. Continuous learning is essential.
When considering how to train members in business skills, SEF staff found that formal business training programs were not suitable. "Outsiders are unlikely to provide the type of 'on-the-ground' skills that are required," said a staff member.
Instead, they have promoted experiential learning and facilitation. For example, meetings are convened where members share lessons that they have learned from their experiences.
These lessons often prove to be very simple, but practical and profit-oriented, such as "Buying enough stock to last for a week rather than for a day saves on transport costs." In this case, providing access to credit enables members to accumulate the inventory of stock that creates the savings.
TCP field workers also facilitate the learning process by allowing members to share their experiences and learn from them, rather than giving instruction to individual members and groups. Members do their own problem solving and support each other as they tackle problems.
If a group cannot solve a member's problem, it can be taken to a center meeting. A center consists of several groups within a village. Before the TCP was organized, center meetings were the traditional and ideal forum for examining common issues and experiences.
Photo by Connie Laas
A center meeting in Khomanani Branch
SEF staff members have found it isn't easy to introduce a business development focus in these meetings. Because members sacrifice valuable business time to attend the meetings, SEF staff needed to determine how to help members develop skills without imposing more burdens of cost or time requirements on the members or themselves.
Their challenge has been to find a way to streamline these activities so they fit into existing meetings and repayment procedures – while providing time for problem sharing and developing solutions. Finding solutions to this problem is an ongoing process and is part of the constant learning approach of the organization.
Assessing Impact
Monitoring the impact of the program's various activities is critically important so that all those involved – members, field staff and management – can learn from what is happening and strive for success. Otherwise problems can occur that make some members feel obligated to repay others' loans so their group is not disqualified from receiving further loans.
But collecting impact data can be costly and time consuming. The SEF avoids this by integrating all data collection into field workers' normal activities. The information is collected in a participatory manner by the leaders of groups. It is stored in branch offices and entered into a database at the head office.
By gathering impact data, field officers get to see how their work is helping others.  For this reason, and because data collection is an integral part of their job, they tend to be careful and reliable data collectors.
This system of monitoring goes beyond the systems for managing information that typically are deployed by most microfinance institutions. They tend to concentrate on loan performance.
The TCP's system monitoring system also provides information about the social and
Photo by Sharda Naidoo
developmental aspects of poverty reduction, such as information about changes in nutrition, schooling for children, and health care. For example, by the time a household receives a second loan, eating patterns change significantly.
"Meat can be consumed at least three times a week, compared with twice a month before," de Wit noted.
The monitoring system also measures indicators of social and business development, such as growth in income and how households use profits; business development progress; and social indicators of development such as problem solving and independent decision making.
"Social development is as much a part of poverty-alleviation as economic development," de Wit said. "Success in business is not sufficient. Rural women need to be able to make decisions and believe in themselves."
Paying a Price for Ideals
Some of the SEF's major donors, who have provided support since its inception, express concerns similar to those voiced by Marang Financial Services' Radinku. "We have supported SEF for more than five years, and they haven't become sustainable," said a donor. "So we have decided to stop supporting the program."
This reduction of support extracts a high price from the SEF. It means that de Wit must split his energies between helping the program succeed and grow, and seeking other sources of funding. But he remains undaunted.
Photo by Connie Laas
A center meeting in Letsitele Branch
"There are donors who do believe in a poverty focus, and these are the ones we will approach," he said.
De Wit also must worry about how to manage growth while maintaining the SEF's high performance levels. Last year, SEF faced repayment problems for the first time in its history. As it tried to increase the size of its loans to longer-term members, many of them experienced problems when they then tried to grow their businesses too fast, and they subsequently had trouble repaying their loans.
De Wit estimates that some 500 members who received larger loans should not have been given larger loans. The staff was unable to distinguish between the more and less successful members, and now it is receiving more supervision and training to rectify the problem, he said.
Complex Questions
The issues that SEF faces are a microcosm of South Africa's development dilemmas. De Wit has invested heavily in staff training, which is a major task in itself. Because staff salary costs are much higher in South Africa than in many other developing countries, it is much harder to achieve sustainability.
Unfortunately, development programs in South Africa cannot tackle a single issue at a time. Discerning whether de Wit has made the right choice to sacrifice financial sustainability in the short term in favor of serving the most poor is a complex question.
Throughout the world, the process of learning how to make microfinance sustainable is still in its early stages. Only a handful of institutions have become financially sustainable. De Wit might have chosen to pursue sustainability by serving only the more capable poor and by using the revenues this generates to cross-subsidize services for the most poor. That approach would have meant sacrificing his ideal.
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