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GOVERNMENT OF ANGOLA

UNITED NATIONS DEVELOPMENT PROGRAMME

Project Title:

ANGOLA ENTERPRISE PROGRAM: MICROFINANCE COMPONENT

______________________________________________________________________________ Brief Description: The Angola Enterprise Program seeks to promote the development of a diverse, robust, micro, small and medium enterprise sector in Angola. This will be achieved by supporting a process to build consensus around a common vision and a national strategy for micro and small business development. The microfinance component will focus on investments to expand the supply of micro and small business credit, leading to the creation of employment and the raising of incomes, essential elements of the Government’s Interim Poverty Reduction Strategy. ________________________________________________________________________________

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EXECUTIVE SUMMARY

Country Review

Angola has experienced decades of economic distortions, the legacy of a centrally planned economy adopted in the years following independence in 1975, together with the war which lasted over 30 years and severely limited movement of resources around the country. However, since the signing of the peace treaty on April 4, 2002, even while facing continued high inflation, the Angolan economy has begun to show dramatic signs of recovery. Angola is rich in natural resources, particularly in terms of agricultural and mineral assets, however economic activity has collapsed in almost all sectors except oil and diamonds leaving the country completely dependent upon imports. The informal sector has become the “sector of last resort” for survival of a large proportion of the population in the cities. It is estimated that more than 50% of the population survive from informal sector businesses while the underdeveloped state of this sector is highlighted by the fact that 82% of Angolan informal microentrepeneurs are self-employed. There is a growing understanding of the need to support the informal sector, which will continue to employ many Angolans for the coming years. In this context the Angolan Enterprise Program has a tremendous opportunity to stimulate the development of the micro, small and medium enterprise sector through investing in the increase of the supply of needed services, while supporting measures to create an environment more conducive to growth.

Market Diagnostic

SUPPLY The banking system remains highly concentrated in the nation’s capital, and focused on the higher segments of the market, which leaves the majority of Angolan enterprises with limited or no access to financial services. The relatively easy profits earned from short term financial intermediation (import/export, foreign exchange, and salary transfers) do not encourage the banks to take risk through lending, particularly to the smaller enterprises. In the whole Angolan banking system today, there are less than 500,000 bank accounts, the vast majority concentrated in Luanda, and less than 150,000 loans. There are a small number of new micro-credit initiatives offering credit to enterprises in the informal sector, but their lack of experience with appropriate methodologies is producing poor results. As the focus of the majority of credit programs continues to be social assistance, aimed as the most vulnerable in society, their growth is limited. The only bank that currently has a microfinance product is Banco Sol, which attends approximately 2000 clients in Luanda and its periphery, and is launching a pilot in Lubango. A new bank, which is expected to concentrate in micro and small business credit (loans up to US$ 50,000), has requested a license from the Central Bank, and should begin trading under the name ‘Nosso Banco’ by September. It will be fully funded by bilateral and multilateral public investors in the form of grants and equity, and operationally managed by the German Consultancy bureau IPC for a period of at least three years. Development Workshop, Angola (DWA) is the only NGO in the country that has a microfinance program which targets operational sustainability, and seeks to implement international best practices. With more than 5000 clients, it is by far the largest program in Angola. DEMAND There is a lack of information regarding the demand for microfinance services in Angola. Limited quantitative data exists regarding the numbers of businesses, type of activities, location, performance etc. and there have been no qualitative studies to determine the needs of the micro and small business people in different regions of the country. A recent UNDP survey found that slightly more than half of the economically active adults worked in the informal sector, while a survey conducted in 2000 by the National Institute of Statistics (INE) across seven provinces covering some 5 million people found

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that the informal micro-enterprise sector, including the unpaid family members, still accounts for 54.5% of the employment in the country. The total number of businesses in the Angolan economy in the formal and informal sectors is currently estimated at around 660,000. If as much as 80% of these enterprises have demand for microfinance services, there are over 530.000 potential micro and small businesses clients which today do not have access to financial services. The microfinance sector is at a very early stage of development, with a small number of institutions supporting pilots reaching a limited number of people. It is a difficult environment, both for the institutions offering microfinance services, and for their clients. The donors are offering funding to grow microcredit portfolios, but before these resources may be effectively used, the challenge is to invest in improving the enabling environment and provide technical assistance to support institutions in their search for appropriate products and delivery mechanisms. There is still room for new players to explore this large, relatively untapped market.

Summary of Challenges

The Angolan economic activity remains concentrated in the oil and diamond sectors, while the country is dependant upon imports to provide everything from basic foodstuffs to inputs for the small industrial sector. The micro, small and medium enterprise sector currently faces serious challenges to growth due to macroeconomic instability and the fragmented Angolan economy. The principal challenges to the development of the Angolan micro, small and medium enterprise sector identified by this component are the following: i) Lack of Information Little information is available regarding the micro, small and medium enterprise sector. Only the most basic quantitative data (i.e. the number of registered companies) exists, while more detailed information (such as revenue, costs, profits etc for companies of varying size operating in different sectors of the economy) is not collected. There has been no qualitative research conducted, and representative groups are weak, so almost nothing is known about behavior and preferences of entrepreneurs around the country. There is also been very little research to examine the important link between Informal and Formal Sector activities. ii) Lack of Coordination There are a number of institutions related to the micro, small and medium enterprise sector, and there is little coordination among them. iii) Excessive Regulation Despite the economic liberalization since the beginning of the 1990s, businesses continue to be affected by a highly regulated environment, with many rules and regulations, onerous and complex licensing procedures, inspection on the part of various state institutions, often with overlapping functions and weak co-ordination, a government enforced maximum profit margin and high tax rates. iv) Limited Supply of Financial Services Access to credit allows businesses to leverage opportunities, make productive investments and grow much faster. Access to savings and insurance services allow clients to protect their wealth and reduce their exposure to risk. Comprehensive impact studies have demonstrated that: (a) microfinance helps poor households meet basic needs and protect against risks; (b) the use of financial services by low-income households is associated with improvements in household economic welfare and enterprise stability or growth; (c) by supporting women’s economic participation, microfinance helps to empower women, promote gender-equity and improve household well-being; (d) the magnitude of impact is positively related to the length of time that clients have been in a microfinance program. Therefore the sustainable supply of financial services has an important role to play in the development of the micro, small and medium enterprise sector in Angola, and will contribute towards the reduction of poverty.

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Component Strategy

The Angolan financial sector is currently targeting exclusively the higher segments of the market. The long-term objective of this project is to support deepening of the commercial financial sector to ensure sustainable access to financial services for poor and low-income people and, in particular, credit for micro and small businesses. The strategy proposed is based upon the financial sector development approach. According to this approach, the expansion of the financial sector is stimulated through a series of investments in:

• dialog between the stakeholders to create consensus around a national strategy, • market studies, • capital to expand loan portfolios • pilots to test new products and markets, and • technical assistance to build local expertise.

The microfinance sector is given particular consideration in this strategy, in accordance with its stage of development. The experience of other countries, where the microfinance industry has advanced through clearly defined stages to arrive at a point where it has been integrated into the commercial financial sector, is used to determine an optimal strategy to stimulate the development of the sector. There are three principal components of the strategy to improve the environment for the micro, small and medium enterprises. Investments will be focused upon:

i) Research It is essential to develop research capacity in an Angolan institution, well positioned to promote the understanding of issues related to the micro, small and medium enterprise sector, whose results would be respected and seen as credible, and could continue to promote research in this area for many years to come.

ii) Building A Consensus Around A Medium-Term Vision In a post-war environment, where for many years the population has either been in conflict, focusing on short-term measures to promote peace and/or deal with humanitarian emergencies, it is important to promote dialogue. All the groups involved with micro, small and medium enterprises need to begin to discuss their views about the medium term development of the sector with the goal of arriving over time at a common vision. Once such a consensus has been built, a national strategy for the development of the sector may be designed, and executed with the support of all the stakeholders.

iii) Promotion Of A Flexible Regulatory Environment It is important to support the Angolan government’s interest in simplifying, and making more flexible the regulation of the micro, small and medium enterprise sector. The Angolan Enterprise Program will invest in the establishment of a Microfinance Development Unit in the Banco Nacional de Angola, (the Central Bank) which will advise policy-makers, and coordinate the development of financial services for microenterprises. These services may be provided by specialized microfinance institutions, traditional commercial banks or new financial intermediaries. The Microfinance Development Unit will focus on supporting the development of both the services and the institutions which provide them, with a view to their eventual integration in the national financial sector.

iv) Expand The Supply Of Credit The microfinance component will invest in three areas to expand the supply of financial services in Angola: CURRENT MICROCREDIT INSTITUTIONS The component will provide support to two existing Angolan microfinance programs, which have the goal of becoming sustainable institutions through the provision of credit services to a large client-base. An investment committee will consider investments in the following activities: The consolidation of existing microcredit projects into microcredit institutions, technical assistance from

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specialists in key areas of institutional development (e.g. governance, human resource management, financial management, management information systems, market studies, product development), the establishment of model pilot branches which apply best practices in microfinance, funding for the expansion of loan portfolios and training courses at experienced, internationally recognized microfinance institutions. NEW MICROFINANCE INITIATIVES The program will look to provide incentives for new market entrants. Market studies will be contracted, and results disseminated. Potential local partners and investors will be identified, and introductions made to international organizations that have experience with microfinance start-ups. SMALL BUSINESS CREDIT The microfinance component will also support pilot projects for commercial banks that intend to venture into lower segments of the market. The investment committee will consider investments in market surveys, which evaluate the potential of a specific market or client, as well as pilot projects in product development, and technology/methodologies tailored to risk management of a new customer base.

Venture Capital Approach

The initial preparatory stage is expected to take approximately 6 months to one year, during which time the investment committee will focus on selected investments necessary to prepare for the implementation of the individual components, such as market studies, capacity building (regulators, microfinance program administrators etc), seminars to build consensus towards national policy, and the launch of a research unit dedicated to issues related to the informal sector. This will be followed by the launch of pilot projects in each of the component areas, to evaluate the potential of a range of methodologies, delivery mechanisms and partners to create an impact in the Angolan context. While the pilots may require adjustments over time to arrive at an adequate model for Angola, it is expected that a number will begin to produce positive results within 6 months to one year. Therefore after approximately 18 months, a review will be conducted to evaluate the results that have been achieved, particularly the possibility of replicating the successes of key pilot projects. The results of this review will support the design of detailed business plans that will project the expansion of each component. These business plans will contribute to a resource mobilization campaign, which will provide the necessary resources to expand the Angola Enterprise Program throughout the country.

Targets

The following performance targets have been established for 18 months after the commencement of the investments under the microfinance component:

(i) A functional microfinance development unit in the Central bank. (ii) The prevalence of micro-credit institutions, which target sustainable operational

structures; (iii) The number of micro and small businesses that have loans has increased from

approximately 8,000 to 15,000 (iv) The government is implementing improvements to make the environment more

supportive for the development of the microfinance sector based on a national policy and action plan to support this sector.

In the follow years the microfinance component should demonstrate the following results:

(v) The number of micro and small businesses that have loans outstanding has increased to 40,000 after 3 years of the program, and to 60,000 after 5 years

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(vi) An environment more supportive to the development of the micro-finance sector is in place, based upon the implementation of a national policy and action plan to support this sector.

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Table of Contents

Executive Summary 2 A Country Context 8 B. The Financial Sector and Microfinance 10 B.1 Supply of Microfinance 10 B.1.1 Formal Sector (institutions and funds, suppliers credit) 10 B.1.2 Semi-formal Sector 12 B.1.3 Informal Sector 13 B.1.4 Wholesale Finance to the Sector 13 B.2 Demand for Microfinance 13 B.3 Legal Environment 14 B.4 Host Country Strategy 15 B.5 Prior and Ongoing Assistance to the Microfinance Sector 16 B.5.1 Government 17 B.5.2 Donors 17 B.5.3 Private Sector 18 B.6 Support Infrastructure 18 B.7 Opportunities and Constraints for Development of Microfinance sector 18 C. Project Justification 20 C.1 Problems to be Addressed: the Present Situation 20 C.2 Expected End of Project Situation 21 C.3 Target Beneficiaries 22 C.4 Project Strategy 22 C.5 UNDP’s policy on microfinance 27 D. Development Objective 28 E. Immediate Objectives, Outputs and Activities 28 F. Institutional Arrangements 30 G. Reasons for UNDP Assistance 31 H. UNDP Exit Strategy 32 I. Special Considerations 32 J. Risks 32 K. Project Reviews, Reporting and Evaluation 33 L. Legal context 34 Annex 1 Map of Angola 35 Annex 2 Budget and Work plan 36 Annex 3 Organizational Chart 37 Annex 4 Terms of Reference: Microfinance Component Manager 38 Annex 5 Terms of Reference: Technical Service Providers 45 Annex 6 Terms of Reference: Investment Committee 47 Annex 7 Terms of Reference: Central Bank Microfinance Unit 49 Annex 8 Strategy for Financial Sector Development 51 Annex 9 List of documents and Reports Consulted 61 Annex 10 Participants in Diagnostic 62

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A. Country Context Since the early 1990s, Angola has been struggling to achieve a complex double transition: from war to peace and from a state-controlled to a market oriented economy, with greater popular participation. The challenges are significant but progress is being made on both fronts. The country has experienced decades of economic distortions, the legacy of a centrally planned economy adopted in the years following independence in 1975, together with the war which lasted over 30 years and severely limited movement of resources around the country. This has left its mark on the country in the form of high numbers of Internal Displaced Persons (current estimates vary between 2.3 and 4 million people), the destruction of much social and economic infrastructure, structural constraints related to land, demography, agriculture and human resources; and institutional weaknesses in the public and private sectors. However, since the signing of the peace treaty on April 4, 2002, even while facing continued high inflation, the Angolan economy has begun to show dramatic signs of recovery. The population of Angola today is approximately 13 million, with 50-60% living in urban centres. The growth rate is high, with the fertility rate at an average of 7.2 children per woman one of the highest in the world. Over two thirds of the population live in poverty, while almost one in three Angolans are extremely poor. The last Household Budget Survey conducted in 2000 –2001 shows a further increase in inequality in the country with the proportion of population living in extreme poverty estimated at almost 24%, a substantial increase from levels recorded in 1995. Angola currently ranks 161 out of 173 countries on UNDP’s Human Development Index for 2002, and the Millennium Development Goals seem distant to achieve. Angola is rich in natural resources, particularly in terms of agricultural and mineral assets, however economic activity has collapsed in almost all sectors except oil and diamonds leaving the country completely dependent upon imports. In the last decade, Angola has experienced serious macroeconomic instability characterised by very high inflation (peaking at 12000% per annum in July 19961), and persistent fiscal and monetary imbalances. In 1999 the central bank resolved to abolish fixed exchange rates. Following this decision, the rate of depreciation dropped to 200% in 2000 and 90% in 2001. Today the Angolan economy faces two key challenges: The first involves making better use of oil and diamond revenues to reduce widespread poverty and the second involves expanding and diversifying economic production. These two challenges are very much linked, as it is only through the rebuilding of the production and services sector that Angola will be able to provide employment and raise incomes. Also as virtually all inputs in the production process (with the exception of unqualified labour) currently must be purchased abroad, the domestic cost of production is extremely high. If productive chains may be rebuilt within Angola, prices will fall, with corresponding benefits for all the population. Angolan small and medium enterprises face tremendous difficulties as they fight to survive and grow in this volatile economy. The formally registered enterprises are being squeezed between the officially limited profit margins and high taxes: the economic police check that no more than a 25% mark-up is being charged to the customer while a combination of monthly and annual taxes produce an effective tax rate on profits of 47%, which leaves little to the owner of the business. There is a paucity of reliable data regarding the activity in this sector: for example official figures show that between 1994 and 2001 13,636 new companies were registered, but there is no further data regarding these new enterprises. The informal sector has become the “sector of last resort” for survival of a large proportion of the population in the cities. Although economic data on this sector is also scarce, a recent study financed 1 The Kwanza was devalued three times within the space of 10 years: in 1990 it was devalued by

a factor of 1000, in 1995 again by 1000, and in 1999 by 1 million.

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by the UNDP on Urban Micro-enterprises in Angola provides some interesting information on this sector. It is estimated that more than 50% of the population survive from informal sector businesses while the underdeveloped state of this sector is highlighted by the fact that 82% of Angolan informal microentrepeneurs are self-employed. Approximately 74% of the informal sector enterprises are involved in commerce while barely 10% engage in traditional productive activities such as baking, carpentry, and welding. Another significant feature of this sector is the predominance of women: 47% of the female population work in the informal sector in comparison with 27% of men2. The UNDP study found that most productive micro-enterprises operate in dilapidated premises, and are hampered by poor infrastructure and public utilities. They are undercapitalised with very limited access to credit and business services. Credit is scarce as the banks demand guarantees and documentation that many of these entrepreneurs do not possess3, while the courses which improve business skills are expensive when available, and of little relevance to those who face the challenges inherent in operating at the lower end of the market. Finding qualified labor is also difficult, as the limited number of Angolan training institutions depend upon government subsidies, and seldom provide the qualifications that the private sector needs. However, optimism is spreading to many parts of the country, as people become convinced that the new peace will last, and the economy begins to show signs of recovery. Angolans are returning to their homes, from the cities and countries where they were forced to make their lives during the war and they are investing in new businesses. The government is beginning to appreciate the importance of these new ventures to the economic recovery and is interested in implementing supportive measures. There is a growing understanding of the need to support the informal sector, which will continue to employ many Angolans for the coming years, although the government currently prioritizes measures targeted at the formalization of micro-enterprises. In this context the Angolan Enterprise Program has a tremendous opportunity to stimulate the development of the micro, small and medium enterprise sector through investing in the increase of the supply of needed services, while supporting measures to create an environment more conducive to growth.

2 Angolan Micro Enterprise Sector, Fion de Vletter, 2002 3 In interviews for the Fion de Vletter study, Micro-entrepreneurs in the service sector said that the main constraint to expansion of these businesses was the lack of financial resources.

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B. The Financial Sector and Microfinance In 1991 the Angolan financial sector was opened to privately owned, domestic and foreign financial institutions to operate in the country. In 1999, the fixed exchange rate was abandoned and ceilings on both borrowing and lending interest rates were lifted, which stimulated the expansion of the nation´s financial institutions. However the banking system remains highly concentrated in the nation’s capital, and focused on the higher segments of the market, which leaves the majority of Angolan enterprises with limited or no access to financial services. In the last year, the growing optimism since the end of the war together with some prodding from the Central Bank has led some banks to open up new branches in the provinces, and even target smaller business clients, but there is still a large un-served market. There are a small number of new Angolan micro-credit initiatives offering credit to enterprises in the informal sector, but their lack of experience with appropriate methodologies is producing poor results. As the focus of the majority of programs continues to be social, aimed as the most vulnerable in society, their growth is limited. B.1 Supply of Microfinance B.1.1 Formal Sector (institutions and funds, supplier’s credit) Today there are 9 Banks in Angola: Three state banks – BCI, BPC and the Central Bank BNA, and 7 banks which have a mix of public and private ownership – BAI, BCA, Banco Sol (the newest bank launched in 2001), BFE, BPA and Banco Totta (Portuguese owned). Four foreign banks currently maintain representative offices within the country. While private sector lending has been increasing dramatically in recent years from USD 112 million in 2000 to USD 336 million in July 2002, it continues to represent less than 15% of the assets of the commercial banking sector. Lending takes place almost exclusively in USD or in Kwanzas linked to the USD. Consumer lending is underdeveloped due to low real incomes, and a lack of formal salaried employees. Years of economic and political distortions (not least the hyperinflation of the last decade) have left a banking sector focused on attending the largest companies, and the richest families. The relatively easy profits earned from short term financial intermediation (import/export, foreign exchange, and salary transfers) do not encourage the banks to take risk through lending, particularly to the smaller enterprises. In the whole Angolan banking system today, there are less than 500,000 bank accounts, the vast majority concentrated in Luanda, and less than 150,000 loans4. Table B1.1 Commercial Banks in Angola, Credit and Deposit Volumes, July 2002 Bank Name No. of

branches*Credit business (USD millions)

Deposit business (USD millions)

Banco de Poupança e Crédito BPC 45 144.9 577.5 Banco de Fomento e Exterior BFE 24 76.0 392.7 Banco Africano de Investimento BAI 16 72.3 327.8 Banco de Comércio e Indústria BCI 20 65.3 183.9 Banco Comercial de Angola BCA 1 13.7 33.8 Banco Português do Atlântico BPA 1 6.9 35.9 Banco Totta e Açores BTA 7 8.1 125.5 Banco Sol SOL 3 0.7 13.5 Others 0.6 22.9 Total 117 388.4 1,713.5 Source: Banco Nacional de Angola Exchange Rate: 1 USD = 44.5 AKZ

4 Data supplied by the Central Bank, Banco Nacional de Angola, June, 2003

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* refers to number planned by end 2002 Table B1.1 shows a summary of the banking sector in Angola in July 2002. There were a total of 117 branches in the country at this time, approximately 70% of which are located in Luanda, while the rest are concentrated along the coastal provinces. There continues to be limited financial infrastructure in the interior of the country. The banks are expanding their branch structure under pressure from the Central Bank, however in interviews with representatives of the UNDP mission a number of banking sector executives complained that the branches outside the capital were not generating sufficient revenue to cover their costs. The concept of microfinance was not understood by the majority of the banking community, being largely confused with small business credit. The incidence of small business loans is on the increase, however in interviews with representatives of the UNDP mission, only two banks claimed to have any real interest in this sector. In general, all the representatives of banks interviewed expressed optimism for the future of the Angolan economy, seeming to be convinced that the recently negotiated peace is sustainable, and as inflation falls, investment is returning to the country. The banks were eager to play a role in the reconstruction of the economy, and were interested in working with the Angolan Enterprise program to expand their activities. The only bank which currently has a microfinance product is Banco Sol (no relation to the Bolivian bank of the same name) which was set up by an ex-governor of the central bank, after having sent a delegation to visit microfinance institutions in Bangladesh. This bank is experimenting with microcredit technology in Luanda, in rural communities around the capital working with the Ministry of the Family, and in Lubango, working in partnership with an international NGO (CLEUSA), which provides technical assistance to low-income farmers. The bank currently has approximately 2000 clients. In conversations with representatives of the UNDP mission, the managers of the microfinance program identified as their principal challenge, the needs to learn from other more experienced institutions, and incorporate international best practices in the industry into their program. A new bank, which is expected to concentrate in micro and small business credit (loans up to US$ 50,000), has requested a license from the Central Bank, and should begin trading under the name ‘Nosso Banco’ by September. It will be fully funded by bilateral and multilateral public investors in the form of grants and equity, and operationally managed by the German Consultancy bureau IPC for a period of at least three years. There are two development funds which operate in Angola, Fundo de Desenvolvimento (Development Fund - FDES) and the Fundo de Assistência Social (Social Assistance Fund - FAS). FDES is a government financed revolving fund, targeted at medium to large companies5, working through the commercial banks, dividing the risk with these institutions. Most of fund´s investments are targeted to large and medium sized companies, however the Novo Horizonte (New Horizon) line is available for new businesses and offers credits from US$5m to150mil. Only 174 credits of this nature had been disbursed by April 2003, and repayments had fallen to less than 30%. The fund’s relationships with the banks that on-lend its resources appears to be somewhat strained. In interviews with representatives of the UNDP mission, a number of banks claimed that the resources were politically directed, and that the companies that receive the loans do not repay, while the fund managers pointed out that they have had to set up their own collection department as the banks are not following up on the loans. Also FDES apparently has a line of up to US$500mil available for a bank who wishes to engage in microcredit, but there have been no interested parties so far. FAS, launched in 1994, is the fruit of a partnership between the Angolan government and the World Bank (which supplies both financing and technical assistance). The fund invests in community-led infrastructure projects in the coastal provinces, with a particular focus on schools, and improving resource management at the level of the municipality. While it was originally contemplated that FAS 5 Average loan is US$250m

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should invest in projects that work to increase incomes, this component was eventually discarded. The fund managers believe that FAS could work in partnership with the Angolan Enterprise Program ‘we work as a catalyst in the municipalities where no one else goes – we do the social part, while you could invest in economic development’. B.1.2 Semi-formal Sector There are a large number of Angolan and international NGOs working throughout the country to provide humanitarian relief in the post-war environment. Some of these have experimented with microcredit programs, targeted at the most vulnerable members of the society, post-combatants and diseased persons. These programs have experienced severe repayment problems and high costs, and have therefore proved unsustainable. Currently Development Workshop, Angola (DWA) is the only NGO in the country that has a microfinance program which targets sustainability, and seeks to implement international best practices. With more than 5000 clients, it is by far the largest program in Angola. DWA is a multi-service NGO, which has been implementing development projects in Angola for over 20 years, during which time it has maintained a long-term focus on development. Throughout its history in Angola, DWA has been, at times the only NGO working in the country, implementing development projects in a variety of sectors, including water access & sanitation, local and community initiatives, improving internet access, shelter initiatives, peace-building, and microfinance. DWA initiated its microfinance program in 1993, but the program remained small. In 1999 it began to grow within the framework of the Luanda Urban Poverty Program (LUPP), financed by the DFID of the United Kingdom (in partnership with One World Action). This program included the Sustainable Livelihoods Program (SLP) focused on microenterprise development and microfinance. The aim of the SLP is to deliver financial and non-financial services to all actors in the Angolan Microfinance Industry, including offering financial services to clients, but also providing technical assistance to other microfinance providers and to the Ad Hoc Forum for Microenterprise Development (FADDME which recently changed its name to the Rede Angolana do Sector Microempresarial, or Angolan Microenterprise Sector Network). Initially, the SLP program was to include a significant component of business development services (BDS) but during the implementation of the program, DFID and DWA took a joint decision to focus primarily on microfinance, as the environment was not conducive to developing successful BDS activities. The SLP lending methodology was developed and tested in the peri-urban areas of Luanda and DWA made its first loan under SLP in April 2000. USAID has provided DW with grant funding to extend the SLP lending methodology (without other related project activities), to Huambo, a province that was particularly devastated by Angola’s long civil war. The Huambo branch opened in November 2001 and made its first loan in March of 2002.

The Ad Hoc forum for the Development of Micro-Enterprise (FADDME). was established in May 2000 to address issues related to the microenterprise sector through a stakeholder forum. It meets quarterly, usually at the Ministry of Social Assistance and Reintegration (MINARS). Participation is open to any organization involved or interested in supporting microenterprises in Angola. Participants include NGO’s operating micro-credit programs, as well as MINARS and Ministry of Family and Promotion of Women, the BNA and some commercial banks. FADDME’s main functions are to:6

Serve as a forum for exchanging experience, information and ideas among the various organizations in the sector

Mediate between microfinance operators and the BNA Lead discussion of draft legislation concerning microfinance Facilitate improved understanding of microfinance methodology Build consensus on microfinance- and microenterprise-related policy Facilitate coordination among operators

6 de Vletter, Fion, 2002

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In 2003, it was transformed into a national network, RASME (Rede Angolana do Setor Microempresarial).

In September 2002, DWA’s two microfinance projects had a total of 5,723 loans outstanding, based upon a solidarity group lending approach. Loans are made to groups formed among 25 members on average. The basis of group formation is trust among members of the group who individually can be involved in different kind of micro-business. The loan conditions are summarized as follows:

Loan amount - USD 50-150 initially per group member with a 40% increment between consecutive loans up to a maximum of USD 294

Loan period - 4 months Capital and interest repayment – weekly Interest rate – 10% on initial loan amount (flat) in USD, or 32.5% nominal annual rate. Processing fee – 2% payable before loan is disbursed Bank fee - 1% payable before loan is disbursed Forced savings – 10% of loan amount payable before loan is disbursed (see next section) Interest rate paid for forced savings – 0% Penalties – a one-time 1% charge when a loan is 3 days late Loans are granted in USD Disbursements are made by staff at the Banco de Fomento Repayments are made in USD by the borrowers directly into the DWA account with the

Banco de Fomento

The DWA board has recently made a decision that the two microfinance projects should be consolidated into a separate microfinance institution which will have operational autonomy from DWA. Negotiations are underway with the UNDP, DFID and USAID regarding the business plan of this new entity, and the technical assistance necessary for the required institutional development. It is hoped that the microfinance program will continue to grow healthily, with support from these three donors. B.1.3 Informal Sector The majority of the population is un-banked, and there are a number of informal mechanisms that have developed to fill this space in the market. Money changers are common on the streets, as the hyperinflation encourages much commerce to take place in US dollars. However the most common informal sector financial service, is group saving schemes, called in Luanda Kixiquilas (in Kindungo, the most common language in this province). These are generally groups of women who know each other from their place of work, and combine their savings to purchase a large quantity of a product, thereby negotiating a discount. This kind of practice clearly builds social capital, and has been used successfully by microfinance projects around the country as a basis for forming solidarity groups. B.1.4 Wholesale Finance to the Sector With the exception of the FDES line, already discussed, and which has so far not been taken advantage of, there is no wholesale finance available in Angola to the microfinance sector B.2 Demand for Microfinance There is very little information regarding the demand for microfinance services in Angola. Limited quantitative data exists regarding the numbers of businesses, types of activities, location, performance etc while almost no qualitative studies have been carried out to determine the needs of the micro and small business people in different regions of the country. The DWA microfinance program estimates that there are around 200,000 micro enterprises in the peri-urban areas of Luanda in which an estimated 3 million people live7. If one assumes that an average household consists of 6 people, this estimate would indicate that around one in three households runs a micro enterprise. The UNDP study found that slightly more than half of the economically active adults worked in the informal sector8. The study notes that many salaried workers in the public sector are involved part time in the informal 7 Development Workshop Angola Microfinance Programme, Draft Business Plan 2003 2007, page 5 8 Angolan Micro Enterpise Sector, Fion de Vletter, 2002

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sector. A survey conducted in 2000 by the National Institute of Statistics (INE) across seven provinces covering some 5 million people found that the informal micro-enterprise sector, including the unpaid family members, still accounts for 54.5% of the employment in Luanda. Figure B.2: Angolan Estimate of Market Sizing

Total Inhabitants 13.000.000 Number of households 2.600.000 20% Number of households with bankable micro enterprises in informal sector 650.000 25% Number of registered small enterprises 13.000 Total enterprises 663.000 Total enterprises that have a demand for microfinance 530.400 80% Potential clients living in potential geographical coverage 397.800 75% Number of active clients/ total potential clients 318.240 80% Average loan $400 Total Potential Active Portfolio $127.296.000

Figure B.2 estimates the demand for microfinance services in Angola at over 500.000 micro and small businesses, which is largely unmet. Most of these businesses could benefit from loans of no more than US 1,000. B.3 Legal Environment The legal and institutional framework dealing with the micro and small business sector is fragmented, and ad-hoc, involving various institutions without a coherent strategy nor means of effective coordination. At the central level the ministries involved are Finance, Public Administration, Employment and Social Security, Fisheries and Environment, Assistance and Social Reintegration, Industry, and Family and Promotion of Women. At the provincial level, the micro-enterprise sector was the specific focus of decree 27/00 (19 May 2000), which created the Department of Micro-Enterprises, within the Provincial Directorates of Industry, Commerce, Tourism and Hotels. At the municipal and community levels, the respective administrations limit themselves to matters concerning the regulation, taxation and control of micro-enterprises rather than providing services to support the development of this sector. Legislation in 1990 specifically permitted NGOs in Angola to conduct activities unrelated to government ministries, although it left the legal status of NGOs in general somewhat ambiguous. Due to the increasing number of international NGOs in Angola in recent years focused on humanitarian relief, the Government of Angola provided new legislation in December 2002. In law 84/02 of 31 December, 2002, various types of NGOs were defined (local, regional, national, international, etc), all under the regulation of the Ministry of Assistance and Social Reinsertion, acting through the Technical Unit for the Coordination of Humanitarian Aid (UTCAH, created by law 30/98 and involving representatives from all the ministries). The various activities that NGOs may carry out are specified, authorized partnerships are described, and the financial accountability (previous years accounts, plus estimate of future year’s donations) must be presented to the Central Bank, Ministry of Finance and the Ministry of Assistance and Social Reinsertion. It is interesting that there is no specific provision for microcredit in this legislation. The Financial Services Law of 1999 (Law 1/99 of 23 April 1999) establishes the supervision and control of banks, finance companies, and credit cooperatives, and states that a separate law will “regulate the micro-credit institutions.” Currently, the Financial Services Law allows only regulated banks and specially licensed finance companies to mobilize deposits from the public, while credit cooperatives may take deposits from members under certain conditions.9

9 Credit cooperatives may only collect deposits from their members and carry out credit operations for the purpose of promoting the productive activity of their members.

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The National Bank of Angola (BNA), the regulatory body, has demonstrated its openness to discuss drafts of the proposed law to regulate microfinance institutions. The mission team had the opportunity to meet with the Superintendent of Banks, Dr. Rui Mingûeis, at the BNA, who has offered to provide a copy of the draft legislation. Interestingly, Dr.Mingûeis mentioned that the BNA will not encourage commercial banks to get involved in offering microcredit because he sees that as putting bank depositors at risk. He pointed out that Banco Sol is currently operating without a specific license to engage in micro-credit, and that the micro portfolio will be regulated as standard consumer loans10. The BNA has been sensitive to the importance of developing the microfinance sector, and has been cautious about regulating the sector before the NGOs have consolidated their programs. It is to be hoped that the proposed legislation will be discussed with microfinance practitioners to determine its effect on what is still a very much infant industry. B.4 Host Country Strategy HISTORY While the Angolan government has never given high priority to the micro and small business sector, during the 1990s, the focus of the public sector moved from large State-owned industries to medium sized private enterprises, when various subsidized credit funds were created. Recently the Ministry of Commerce has taken steps to simplify the licensing procedures for commercial enterprises. For example, decree no. 7/00 authorized the setting up the One-stop Enterprise Window (Guichet Único da Empresa), which is intended to simplify licensing procedures in all sectors. However, the Guichet is still not yet fully operational, more than two years later. As the Government approach to the micro, small and medium enterprise sector has always been ad hoc, it has resulted in a profusion of institutions without a coherent strategy nor means of effective co-ordination. The Ministries of Finance, Public Administration, Employment and Social Security, Fisheries and Environment, Assistance and Social Reintegration, Industry, and Family and Promotion of Women are, responsible for the following institutions:

• the National Institute for the Promotion of Small and Medium Enterprises (INAPEM), which focuses on training (and formerly financing) small and medium enterprises;

• the National Institute for Employment and Vocational Training (INEFOP), which provides support to small productive activities through training and the provision of kits;

• the Institute for Artisan Fishing (IPA); • the Institute for the Socio-Economic Reintegration of War Veterans (IRSEM), which

supports demobilized soldiers and other vulnerable groups; • special credit funds, which include the Fund for Economic and Social Development (FDES),

the Fund for the Support of National Businessmen (FAEN) and the Fund for the Development of the Fishing Industry (FADEPA) (see Section 4.3).

These national institutions are responsible for implementing policies primarily relating to training, material support and institutional support for businesses in the respective sectors. The funds, were created to provide financial support to enterprises, mainly through loans. It should be noted that most of the institutions and funds mentioned above are mainly directed to supporting small and medium sized enterprises. It is more at the administrative levels (licensing and taxation) that the micro-enterprise sector is directly affected. At the regional level decree no. 27/00 of 19 May 2000 established in each province a Department for Micro-enterprises, within the Provincial Directorate of Industry, Commerce, Tourism and Hotels. Unfortunately it appears that these departments are still not functioning in all provinces and their role 10 This is common internationally among bank regulators who see microfinance loans as un-collateralized consumer lending. Microfinance practitioners in such situations often demonstrate that microcredit presents a different, less risky profile than consumer lending and tends to present very little risk to depositors or to the financial system.

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is not yet clear, (article 24 of the decree mentions that the departments should study methods and techniques for increasing food production and ensure the rehabilitation of the industrial sector at the provincial level). At the municipal and community levels, the respective administrations limit themselves to matters concerning the regulation, taxation and control of micro-enterprise activities, rather than providing services to support the development of the sector.

FUTURE TRENDS The direction of public policy for the next years should be governed by the Angolan Government’s draft Interim Poverty Reduction Strategy Paper which proposes actions that can be summarized along five broad themes:

Undertaking economic and institutional reform; Expanding the human capital base; Rehabilitating social and economic infrastructure; Promoting growth in the lower segments of the private sector, directly benefiting the poor

through rural development, artisan fishing, and small and micro enterprises; Strengthening public sector capacity and institutions, including at the provincial and local

levels. The Government has also agreed a Transitional Support Strategy with the World Bank which encompasses three main pillars:

i) enhancement of transparency, efficiency and the credibility of public sector resource management;

ii) expansion of service delivery to war-affected and other vulnerable groups; and iii) the preparation for pro-poor economic growth.

MICROFINANCE In meetings with representatives of the UNDP mission, the Minister for Women and the Family emphasized that one of the goals of the Ministry is ‘the promotion of access to microcredit services for women, heads of family, who live in the rural areas’. To achieve this goal, the ministry is currently financing and directly managing microcredit pilots in the rural areas (reaching 100 families with a goal to expand to 250 families11. However this is seen as a short term strategy due to the current lack of initiatives in the country, and the Ministry intends to work through independent organizations in the future. A representative of the Ministry of Commerce also expressed support, in a meeting with the UNDP mission, for the expansion of microcredit, as a strategy to support all microenterprises. The central bank, Banco Nacional de Angola (BNA) is charged by the Angolan government with the development of the national financial system, and is committed to expand the supply of financial services throughout the country. BNA should be seen as the logical partner to work with the Angola Enterprise Program as it invests in the expansion of the supply of credit to micro, small and medium enterprises. B.5 Prior and Ongoing Assistance to the Microfinance Sector Traditionally, the Government has not given much attention to the micro and small business sector. However, during the 1990s, it changed its focus of attention from large State-owned industries to medium sized private enterprises, creating various subsidized credit funds. Recently the Ministry of Commerce has taken steps to simplify the licensing procedures for commercial enterprises. Decree no. 7/00 of 3 February 2000 recognised that:

‘the relations between the administration and economic agents has been characterized by a complexity of channels, mechanisms, norms and lengthy administrative procedures, which constitute a major constraint in the development of business incentives.’

and authorised the setting up the One-stop Enterprise Window (Guichet Único da Empresa), which is intended to simplify licensing procedures in all sectors. However, the Guichet is still not yet fully operational, two years after the decree. 11 Interview with Minister Cândida Celeste

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The availability of documentation and titles, and the processes required to obtain them should be studied carefully, especially in a post-conflict environment such as Angola, where a large part of the population lack the basic legal evidence of their entitlements (identification, proof of address, deed to property etc). Without this basic documentation, the system of contracts upon which business, banking, and the legal system operate is severely restrained. It is important to, create more flexible regulations that can accommodate (without excessive charges and requirements) the economic activity currently operating beyond the law, and once the new more flexible regulations are in place, incentives rather than repressive measures should be used to encourage rather than coerce small businesses to register themselves. Initiatives from the international donor community are working to promote the micro, small and medium enterprise sector, for example the UNDP funded a study on the microenterprise sector published in May 2002 (see bibliography), conducted by Fion de Vletter. The Luanda Urban Povery Programme (LUPP) financed by DFID contains an important component (the Sustainable Livelihoods Program) which provides financial and technical assistance to microfinance providers and support for developing a national network of practitioners. USAID has provided a grant to DWA to open an additional branch in Huambo, and expects to provide resources to a new microenterprise bank, Nosso Banco, later in 2003. Also the World Bank is planning to invest approximately US$200,000 in microcredit programs focussed on demobilized soldiers. B.5.1 Government B.5.2 Donors The principal international donors which are active in Angola are the World Bank, UNDP, USAID, and DFID. While the majority of the resources of these agencies continue to be dedicated to short term relief projects, each is beginning to prioritize medium-term development strategies, including microfinance. The World Bank is supporting the IPC led bank, Nosso Banco, together with USAID, and has announced that it will provide US$200m for microfinance activities which target demobilized soldiers. USAID prioritizes the areas of food security, health, democracy and governance, but also finances a number of projects which promote the micro and small enterprise sector. As well as the resources for Nosso Banco, USAID is financing DWA’s project in Huambo, and the US NGO CLEUSA, which is providing technical assistance to rural workers, in partnership with Banco Sol’s microfinance pilot in Lubango. As part of its partnership with Chevron, USAID is financing technical assistance in the province of Cabinda, working to develop small and micro enterprises which could provide services to the oil company (packing, transport, food, distribution etc). DFID’s principal program is the Luanda Urban Poverty Program (LUPP), which in its first phase invested 7 million pounds in projects around the nation´s capital. An important sub-component of this program is the Sustainable Livelihoods Project, which finances the majority of DWAs microfinance activities. The second phase of this LUPP program has recently begun, and is expected to commit 9 million pounds over 3 years, 4 million of which is dedicated to short-term humanitarian assistance. With the planned end of the support for relief efforts in 2004, DFID will have available 4 million pounds that will be targeted towards more medium term development programs. The UNDP is coordinating a number of humanitarian relief efforts around Angola, but has so far committed few resources to microfinance. However In the last year it has provided technical assistance to DWA, financing an institutional evaluation, and supporting the preparation of a medium-term business plan. The UNDP is currently playing an important role in coordinating the donor strategies in the area of microfinance, particularly with regards to DWA, who has been at times pulled in different directions by the different strategies of USAID and DFID. It is hoped that the Angolan Enterprise Program will continue efforts in this direction, as the microfinance sector will only prosper through coordinated action.

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B.5.3 Private Sector There is little private sector support for the development of the micro and small enterprise sector. The banking community, as has been already discussed, neglects completely this segment of the market, while the large corporations, at most, donate funds to the most visible humanitarian relief projects. Shop credit is not significant as the majority of products continue to move through the market places, and street traders12. There appears to be few suppliers’ credits available for microbusinesses to purchase their merchandise within the complex supply chains that exist in the urban centers. In some cases, the owners of the warehouses, which provide storage around the urban areas for a variety of products, offer short term credit (a few days at most) to the street hawkers to purchase the goods they carry to the clientele. More research has to be carried out to understand the relationships in these supply chains, and identify potential clients. In particular, it is important to separate salesmen, who earn commission for their work (and therefore are employees rather than entrepreneurs), from those who purchase their working capital, and determine their own selling strategy and price (and may therefore benefit from a loan to leverage their business). It is hoped that the Chevron-Texaco initiative to finance an Angolan Enterprise Program will encourage other companies, both national and international, to invest in the development of the micro, small and medium enterprise sector. B.6 Support Infrastructure The support infrastructure for the microfinance, and micro, small and medium enterprise sector in Angola is virtually non existent. There is limited research regarding this sector of the economy, and there continues to be a reluctance among some members of the government to accept the important role that it plays in providing employment and incomes for the majority of the population. There are no national consultants who have experience working with the microenterprise sector, while the government financed system of management courses, and vocational training is targeted at the large enterprise sector. Professional services in general have limited availability, and are beyond the reach of most small enterprises, and few understand the needs of microfinance programs. The success of the microfinance industry and the development of the micro, small and medium enterprise sector will require significant investments in the enabling environment. B.7 Opportunities and Constraints for Development of Microfinance sector Currently only two institutions are specialized in the provision of credit to micro, and small enterprises, the commercial bank Banco Sol and the international NGO, Development Workshop Angola. Their combined total active client base is less than 8,000 clients, and is heavily concentrated (>80%) in the capital, Luanda. These institutions are still in a pioneering stage with respect to providing microfinance as both are experimenting with different products and methodologies while experiencing volatile repayment rates. They have a predominantly social focus and do not yet generate sufficient revenues from their lending activities to cover their costs. The banks have a very limited penetration of the Angolan population, and do not prioritize small business lending in their expansion strategies. There is limited information on micro, small, and medium enterprise sector, almost no support services for institutions operating in this segment of the economy, and the government has yet to design a policy for small business development. However there is a growing optimism regarding the Angolan economy. The stability brought by confidence in a sustainable peace process, together with falling inflation is bringing resources back to Angola, both financial, and in terms of educated Angolans who have international employment experience. People are starting new businesses, and the government and the banking community are beginning to understand the importance that this could have in promoting economic recovery. The 12 A representative of Coca-Cola, the principal soft-drink manufacturer in Angola told representatives of the mission that the company distributes more than 70% of its production through the informal market, working through 15m warehouse owners, and more than 3m street vendors.

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Angolan Enterprise Program could support this trend though investments in promoting dialog between sectors of society regarding the challenges of developing the small business sector, with a view to eventually prioritizing a national strategy. The microfinance sector is at a very early stage of development, with a small number of institutions supporting pilots reaching a limited number of people. It is a difficult environment, both for the institutions offering microfinance services, and for their clients. The donors are offering funding to grow portfolios, but before these resources may be used effectively, the challenge is to provide technical assistance to support these institutions in their search for appropriate products and delivery mechanisms, and investments in improving the enabling environment. And there is still room for new players to explore this large, relatively untapped market.

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C. Project Justification C.1 Problems to be Addressed: The Present Situation The Angolan economic activity remains concentrated in the oil and diamond sectors, while the country is dependant upon imports to provide everything from basic foodstuffs to inputs to the small industrial sector. The micro, small and medium enterprise sector currently faces serious challenges to growth due to macroeconomic instability and the fragmented Angolan economy. The prolonged conflict and limited investment in basic infrastructure has meant that access to electricity, water, roads, and communications is precarious, while the many rules and regulations, onerous and complex licensing procedures and high taxes stifle investment. Although there is currently a profusion of institutions that are working to support this sector, there is no coordinated strategy. The principal challenges the to development of the Angolan micro, small and medium enterprise sector identified by this component are the following: LACK OF INFORMATION Little information is available regarding the micro, small and medium enterprise sector. The Angolan definition of these three types of companies is currently based simply upon the number of employees: Micro: Up to 5 employees Small: 6 to 49 employees Medium: 50 to 199 employees Only the most basic quantitative data (i.e. the number of registered companies) exists, while more detailed information (such as revenue, costs, profits etc for companies of varying size operating in different sectors of the economy) is simply not collected. There has not been any qualitative research conducted, so almost nothing is known about behavior and preferences of entrepreneurs around the country. There has also been very little research to examine the important link between Informal and Formal Sector activities. Without accurate data regarding the micro, small and medium enterprises, it is extremely difficult to identify opportunities for investment and determine effective policies to support the development of the sector. POOR COORDINATION There are a number of institutions related to the micro, small and medium enterprise sector, and there is little coordination among them. A small number of poorly, funded NGOs advocate for segments of the informal economy (typically women entrepreneurs and ambulatory traders), the Chambers of Commerce represent medium size companies, while various ministries compete to promote different groups in the sector (eg: At the national level, the ministries involved are Finance, Public Administration, Employment and Social Security, Fisheries and Environment, Assistance and Social Reintegration, Industry, and Family and Promotion of Women) and there is very little dialog between them. There is no forum for discussion, and while the government has included a strategy to ‘Support a Development Strategy for Small and Micro Industrial Units’ (part of the fifth priority axis of intervention entitles ‘More Integrated And Articulated Productive Structure’) as an important element in the Interim Poverty Strategy Reduction Program, this has yet to be developed. It is clear that the Angolan government has not yet prioritised measures to promote the development of the micro, small and medium enterprise Sector, and the country is far from a consensus as to what the national strategy in this area should be EXCESSIVE REGULATION Despite the economic liberalization since the beginning of the 1990s, businesses continue to be affected by a highly regulated environment, with many rules and regulations, onerous and complex licensing procedures, inspection on the part of various state institutions, often with overlapping functions and weak co-ordination, a government enforced maximum profit margin and high tax rates.

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For formal enterprises or, those who wish to obtain a formal registry, the licensing requirements and procedures remain fairly complicated. License costs vary according to the sector, but they appear to be in the range of $250-350. The time required to get all the documentation in order also varies considerably, but it seems that between three to six months is the norm, though it can take much longer13. All micro-entrepreneurs involved in retail sales in markets and on the streets in urban areas are subject to rules and procedures which require their licensing (in the form of cartões feirantes for market vendors or cartões de vendedor ambulante for street sellers) as well as the payments of fees to fiscais who collect on behalf of the Municipal Administration. Although fees vary according to types of activities, they will generally amount to about 5 kwanzas per day, and that is applied in general throughout the whole country, independent of the economic reality of the region. These constraints and disincentives force many enterprises into the informal sector and limit their growth potential, as they do not have the means to cope with the complicated bureaucratic processes. LIMITED SUPPLY OF FINANCIAL SERVICES

i) Microcredit As was shown in section B, it is clear that the microcredit industry in Angola is at a very early stage in its development. Estimated at more than 500.000 micro and small businesses (see section B2), the demand for microfinance services in Angola is largely unmet. Only two institutions are specialized in the providing those services and their combined total active client base is less than 8,000 clients. If the supply is to expand to meet the demand, the current market participants will need to build capacity, and grow rapidly. Even so, there is room for new market entrants.

ii) Small Business Credit As can be seen from section B, the Angolan commercial banks only reach a small percentage of the demand for business-loans between US$ 1,000 and US$ 50,000. The banking system remains highly concentrated in the nation’s capital, and focused on the higher segments of the market. Few Angolan banks target lending to the small business sector as part of their core strategy, they lack information regarding the potential market for loans less than US$ 50,000 and have little understanding of the products and procedures necessary to penetrate this market.

Access to credit allows businesses to leverage opportunities, make productive investments and grow much faster. Access to savings and insurance services allows clients to protect their wealth and reduce their exposure to risk. Comprehensive impact studies have also demonstrated that: (i) microfinance helps poor households meet basic needs and protect against risks; (ii) the use of financial services by low-income households is associated with improvements in household economic welfare and enterprise stability or growth; (iii) by supporting women’s economic participation, microfinance helps to empower women, thus promoting gender-equity and improving household well-being; (iv) for almost all significant impacts, the magnitude of impact is positively related to the length of time that clients have been in a microfinance program.14 Therefore the sustainable supply of financial services has an important role to play in the development of the micro, small and medium enterprise sector in Angola, and will contribute towards the reduction of poverty. C.2 Expected End of Project Situation It is expected that there is in place at the end of the project:

i) a national policy and action plan for the promotion of financial sector development, based upon a consensus reached among stakeholders, adopted by the Angolan government.

13 de Vletter, Fion, 2002 14 Clients in Context, The Impacts of Microfinance in Three Countries, Assessing the Impact of Microenterprise Services (AIMS), January 2002 (www.mip.org).

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ii) The National Bank of Angola will have established a microfinance development unit, to play a crucial role in driving the development of the microfinance sector.

iii) Two or more market leaders will have emerged, who demonstrate that microfinance can be provided on a commercial basis.

iv) Two or more commercial banks will have developed new lending products for small and medium enterprises, and will be profitably expanding their services to these clients.

v) As a result of greater dialog among stakeholders, and dissemination of research regarding informal sector economic activity, more flexible legislation has been passed to support micro-enterprise growth

vi) Starting from a base from around 10,000 loans outstanding for micro, small and medium enterprises in mid 2003, it is expected that after five years of the program the number of outstanding loans has grown to more than 80,000.

C.3 Target Beneficiaries The direct beneficiaries of the Angolan Enterprise Program Microfinance component are all the stakeholders in the financial sector who are willing to participate in a process to deepen the penetration of credit services: microfinance institutions that demonstrate the potential to deliver microfinance in a commercial manner, commercial banks that are willing to downscale by targeting the demand for micro, small and/or medium enterprises, the Central Bank through the support to the microfinance development unit, and representatives of Angolan enterprises who will participate in the forums promoting dialog between stakeholders. The indirect beneficiaries are the owners of micro, small and medium enterprises and the investors in these businesses who will increase their standard of living by having sustainable access to financial services on a permanent basis. Other indirect beneficiaries are the employees and potential employees (currently unemployed) due to increased opportunities in the expanding micro, small and medium enterprise sector. Eventually it is hoped that all the citizens of Angola will benefit from a growing, more diversified economy C.4 Project Strategy The Angolan financial sector is currently targeting exclusively the higher segments of the market. The long-term objective of this project is to support deepening of the commercial financial sector to ensure sustainable access to financial services for poor and low-income people and, in particular, credit for micro and small businesses. The strategy proposed is based upon the financial sector development approach, detailed in Appendix 8. According to this approach, the expansion of the financial sector is stimulated through a series of investments in

i) dialog between the stakeholders to create consensus around a national strategy, ii) market studies, iii) pilots iv) technical assistance and v) capital to expand lending portfolios.

The microfinance sector is given particular consideration in this strategy, in accordance with its stage of development. The experience of other countries, where the microfinance industry has advanced through clearly defined stages until it has been integrated into the commercial financial sector, is used to determine an optimal strategy to stimulate the development of the sector. According to this methodology, the microfinance sector in Angola is at the start-up phase. Currently only two institutions are experimenting with growing microcredit programs, while very few banks are venturing into lending to small and medium enterprises. The regulatory and legal environment is not supportive to the growth of small enterprises and there are few investors in the microfinance sector. This microfinance component of the Angolan Enterprise Program will address these challenges while targeting the problems described in chapter C.1.

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There are three principal components of the strategy to improve the environment for the micro, small and medium enterprises. Investment will be focused on: RESEARCH It is essential to develop research capacity in an Angolan institution, well positioned to promote learning about issues related to the micro, small and medium enterprise sector, whose results would be respected and seen as credible, and which would be able continue to promote research in this area for many years to come. The Angolan Enterprise Program intends to invest in the founding of a Micro, Small and Medium Enterprise Research Unit, and share the running costs for a period of time negotiable with the host institution, depending upon available resources. The research unit should be located in a prominent Angolan University, or research institute, which would build a knowledge base and disseminate accurate information to stakeholders. Cost-sharing will decline over time, to encourage the institution to develop an independent funding strategy The different components of the Angolan Enterprise Program will contract the research unit to provide studies on micro, small, and medium enterprises, with a special focus on barriers to development of this sector. The informal sector and issues pertaining to its development will be the on-going focus of the research unit. It will be important to understand the importance of the informal sector within the national economy, and analyse how it interacts with the formal sector. Both quantitative and qualitative research projects will be financed and the results used in national seminars and workshops to inform policy makers and other relevant actors throughout the country.

BUILDING A CONSENSUS AROUND A MEDIUM-TERM VISION In a post-war environment, where for many years the population has either been in conflict, or focusing on short-term measures to promote peace and/or deal with humanitarian emergencies, it is essential to promote dialogue. All the groups involved with micro, small and medium enterprises need to begin to discuss their views about the medium term development of the sector with the goal of arriving over time at a common vision. Once such a consensus has been built, a national strategy for the development of the sector may be designed, and executed with the support of all the stakeholders. The Angolan Enterprise Program will invest in training stakeholders through the provision of courses and building contacts with equivalent groups in other countries, to facilitate the exchange of ideas and experiences. Investments in civil society institutions linked to the development of this sector (traders and market associations, chambers of commerce etc) will be considered to support the strengthening of representation of these groups. The Program Coordinator will organize national seminars, where leading international and national figures will debate the results of research on the Angolan micro, small and medium enterprise sector. Dialogue between representatives of the public and private sector will be encouraged through the financing of regular forums, where issues of importance to both groups will be discussed. PROMOTION OF A FLEXIBLE REGULATORY ENVIRONMENT It is important to support the Angolan government’s interest in simplifying, and making more flexible the regulation of the micro, small and medium enterprise sector. The Angolan Enterprise Program will invest in the formation of taskforces, incorporating representatives of all the stakeholders who are affected by the regulation of this sector, from policy makers to entrepreneurs, to identify and examine key problems with regulations and laws. The taskforces will then report publicly on strategies to ease the excessive regulation of the micro, small and medium enterprise sector. The Angolan Enterprise Program will invest in bringing leading international experts in the area of financial and commercial regulation, to support the study of processes to improve national legislation pertaining to this sector by Angolan organizations (public and private). The Angolan Enterprise Program will invest in the establishment of a Microfinance Development Unit in the National Bank of Angola, (the Central Bank) which will function as coordinator for the

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development of a financial service sector for micro enterprises. These services may be provided by specialized microfinance institutions, traditional commercial banks or new institutions, however, the Microfinance Development Unit will focus on supporting the development of both the services and the institutions which provide them, with a view to their eventual integration in the national financial sector. The Angola Enterprise Program will contract an experienced microfinance consultant, the microfinance component manager, who will work with the Central Bank employees of the Microfinance Development Unit to build their expertise in the following areas:

• the compiling of a central data base with the results of regional micro-enterprise sector studies (constraints and opportunities for development). New investors will be able to reduce the costs involved in researching the potential of new markets.

• the provision of advice for policy makers and regulators. It is important that the government develop internal capacity regarding issues related to the sector to support policy making, and eliminate excessive regulation.

• information dissemination (including translation of international studies and reports on best practices in the microfinance industry). There is limited information currently available in the Portuguese language regarding best practices in microfinance. It will be important to translate international material and distribute with appropriate forums.

• promotion of investment in the provision of national support services to the microfinance sector (auditing, accounting, legal, IT). Initially international expertise will be required to support the development of the sector, but through a coordinated program of building domestic capacity (partnering local professional institutions period with the international experts when hired), local expertise may be developed.

• development of industry standards in the area of transparency, and performance bench marks. It is important to encourage the exchange of information and experience within the domestic microfinance sector, to replicate successes rapidly and learn from failure. This must be stimulated through an industry standard, and systematic transparent reporting, enforced by the central bank.

It is expected that the Microfinance Development Unit will participate actively in the process to develop a common vision for the development of the micro, small, and medium enterprise sector, specifically supporting the design of a national policy and action plan for the microfinance sector. This process would include the dissemination of information on international best practices in microfinance, and joint research studies with local institutions. EXPAND THE SUPPLY OF CREDIT The microfinance component will invest in three areas to expand the supply of credit services in Angola:

i) Current Microcredit Institutions The Program intends to support two existing Angolan microfinance programs, which have the goal of becoming sustainable institutions through the provision of credit services to a large client-base. The size and nature of the support for the selected institutions will be based upon an institutional assessment and a business plan proposal, the preparation of which may be financed by the program. The necessary investments in capacity building for these institutions will be negotiated as part of a performance based agreement. The microfinance component will consider investments in the following activities: The consolidation of existing microcredit projects into microcredit institutions, technical assistance from specialists in key areas of institutional development (e.g. governance, human resource management, financial management, management information systems, market studies, product development), the establishment of model pilot branches which apply best practices in microfinance, and training courses at experienced, internationally recognized microfinance institutions.

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ii) New Microfinance Initiatives The program will look to provide incentives for new market entrants. Market studies will be contracted, and results disseminated. Potential local partners and investors will be identified, and introductions made to international organizations that have experience with microfinance start-ups. Other technical assistance, as discussed in i) will be evaluated on a case by base basis, according to available resources.

The contribution of the Project will be structured in close collaboration with DFID, USAID and UNDP who currently provide financial support to Angolan microfinance projects.

iii) Small Business Credit The microfinance component will also support pilot projects for commercial banks which intend to venture into lower segments of the market. Investments will be made in the following areas: a) market surveys which evaluate the potential of a specific market or client base (proposed by various stakeholders). The Results of market studies will be disseminated among the financial sector in an attempt to identify which institutions have interest in pursuing the opportunities identified in the study. b) Pilot projects in product development, and technology/methodologies tailored to risk management of a new customer base. The Program will enter into memorandums of understanding with financial institutions interested in implementing pilots, reducing the risk for commercial institutions to launch pilots through cost sharing. Successful pilots will be replicated and expanded to other regions.

In this way the Angolan financial sector will be strengthened and expanded, increasing dramatically the supply of credit to the micro, small and medium enterprise sector. NOTE: In the project document, the first three elements of the strategy presented here, were grouped together under the component ´enabling environment´, as it was felt that these investments would provide synergies also to the vocational training, and business development services projects, and should therefore not consume the budget of the microfinance component. However in this document, with the intention of presenting a complete, coherent strategy, following the model of the financial sector development approach, all elements of the strategy which pertain to the expansion of microcredit are included.

Venture Capital Approach The strategy of the Angolan Enterprise Program is based upon a venture capital approach, which envisages a number of different phases of development:

i) Start-up ii) Pilots iii) 18 month Review iv) Resource Mobilization v) Expansion vi) Periodic Program Evaluation

The initial preparatory stage is expected to take approximately 6 months to one year, during which time the program will focus on selected investments necessary to prepare for the implementation of the individual components, such as market studies, capacity building (regulators, microfinance program administrators etc), seminars to build consensus towards national policy, and the launch of a research unit dedicated to issues related to the informal sector. This will be followed by pilot projects in each of the component areas, to evaluate the potential of a range of methodologies, delivery mechanisms and partners to create an impact in the Angolan context. While the pilots may require adjustments over time to arrive at an adequate model for Angola, it is expected that a number will begin to produce positive results within 6 months to one year. Therefore after approximately 18

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months, a review will be conducted to evaluate the results that have been achieved, particularly the possibility of replicating the successes of key pilot projects. The results of this review will support the design of detailed business plans for each component, projecting the expansion of the successful projects. The business plans will contribute to a resource mobilization campaign, to provide the necessary resources to expand the Angola Enterprise Program throughout the country. While the vocational training, business development services, and microfinance components are relatively independent from each other in terms of investments, goals and development paths, they very much depend upon the enabling environment component for their eventual success. Therefore the first stage of the program will focus on the investments that improve the environment. Due diligence of identified partners will also be conducted as a necessary precondition to initiating program investments. ► Start-up

In this phase the program staff must be hired, and trained. Systems will be installed, and/or adapted to produce the management reports, and provide the information necessary to direct the program, and demonstrate the transparent, effective use of resources. Key stakeholders will be identified, and a program of raising awareness among this group will begin involving national seminars, courses, international visits and twinning arrangements. The most appropriate host institute for the micro and small business sector research centre will be selected, based upon demonstrated capacity and commitment to the goals of the program. A cost-sharing agreement will be negotiated with this institute, and international expertise contracted to support the launch of research activities (initially with a focus on the informal economy). Expertise will be subcontracted to begin the in-depth market studies for the vocational training, BDS and microfinance components. As part of the market studies, potential partner institutions (government institutions, NGOs and private sector firms/banks) will be evaluated in terms of their capacity to contribute to the program. Negotiations will begin to co-finance, together with the Banco Nacional de Angola, a microfinance development unit. Support from international microfinance specialists will be important to support the Central Bank staff in the initial stages of this unit’s development.

The program steering committee will be formed, and early meetings will focus on coordinating the activities of the program with other Angolan development programs (FAS, FDES etc).

► Pilots Pilot projects will be launched to assess the appropriateness of partner institutions, methodologies and delivery mechanisms. Commercial banks who wish to explore the potential of downscaling will partner with the fund to co-finance pilots. Technical assistance by microfinance specialists will be provided to selected micro-credit providers to resolve identified constraints to growth. The pilot projects will be selected according to their ability to deliver short term results, and contribute towards the efforts to mobilize resources to expand the microfinance component.

► 18 month Review After approximately 18 months, an interim review will be conducted to evaluate the program and assess its progress against the established benchmarks. Particular attention will be paid to an evaluation of the pilot projects. Adjustments will be made to pilot design in accordance with the results of this review. Successful pilots will be identified for future replication and expansion.

►Resource Mobilization

It is expected that within 18 months to 2 years from the beginning of the Angolan Enterprise Program, the conditions will be in place for the program to seek further funding to expand the investments, and continue coverage beyond the three-year initial phase.

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The program should be able to demonstrate clear progress in the following areas: the micro and small business research centre and microfinance development unit functioning inside Angolan institutions, on-going capacity building initiatives with stakeholders, dialog between government, private sector and representatives of civil society regarding issues pertaining to the development of the micro, small and medium enterprise sector, positive results from certain pilot projects, transparent program operating procedures. Data regarding these activities together with the business plans for each component will be utilized in a campaign to develop business plans and mobilize resources for the expansion of the program.

► Expansion

Based upon the availability of resources, investments will be made to replicate and increase the successful pilot projects in each component throughout Angola. In this way the supply of services to the micro, small and medium enterprise sector will grow in all the regions of the country. The program, and the institutions financed will be monitored, according to predefined targets. Institutions that perform well will be rewarded with further access to funding to allow them to continue to grow rapidly. The most successful service providers will grow, and begin to generate revenues sufficient to cover their costs. Eventually they will not depend upon the financial support of the Angola Enterprise Program, which may direct its investments towards the development of other institutions. Less successful service providers may receive support from the program to identify institutional difficulties, and implement measures to overcome them. Prolonged failure to meet targets will lead to exclusion of the program. Institutional evaluations will be contracted on a regular basis to monitor the development of participating institutions. Cost-recovery strategies will be prioritized to discourage the dependence of participating institutions on program funding. The program staff will be increased according to the level of activity of the program, and available resources. The time frame of the program may be extended beyond the original three years determined in the program design, according to the commitment of the partners, and available resources.

►Periodic Program Evaluation Frequent reviews will be conducted to evaluate the success of the program’s investments in different regions of the company. The results of these assessments will be utilized to adjust the strategy of the program. Positive results may be incorporated into resource mobilization efforts.

The Angola Enterprise Program is consistent with the UNDP mandate in so far as it helps countries in their efforts to promote sustainable human development, and will be aligned with efforts to support the achievement of Millennium Goal 1: Eradicate Extreme Poverty. The project is in line with the 2001-2003 ANGOLA-UNDP CCF. The UNDP will provide support to the overall strategic direction of the program and will play a greater upstream role in the area of policy support, regulation, legal frameworks and institutional-building.

C.5 UNDP’s Policy in Microfinance When used for credit-related activities, UNDP funds must be used in line with "Small and Micro Enterprise Finance Guiding principles for Selecting and Support Intermediaries". The UNDP country office in consultation with the designated institution15 must ensure that any institution receiving a micro-capital grant is able to demonstrate competency in the following areas: a) Institutional strength. Sound institutional culture with a mission and vision that is supportive of the expansion of microfinance services to low-income clients; management and information systems that provide accurate and transparent financial reports according to internationally recognized standards; and

15 Read executing or implementing agency

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efficient operating systems; b) Quality service and outreach. Focus on serving low-income clients and on expanding client reach and market penetration; financial services that meet the needs of the clients and c) Sound financial performance. Interest rates on loans sufficient to cover the full costs of efficient lending on a sustainable basis; low portfolio in arrears and low default rates; a diversified funding base for its microfinance operations to minimize dependency on donor subsidies16. All recipient institutions must have a system for reporting regularly on the quality of its services, outreach and financial performance, as follows: a) Reporting on outreach and performance through an initial baseline report and thereafter each quarter; b) Financial performance including balance sheet, income statement and audited financial statements, annually; c) Institutional development through an initial baseline report and annual reports thereafter17. Grants for credit activities can be used by the recipient organization to cover the costs of its operations, purchase equipment, hire new staff, or capitalize funds within the financial limits set out in article 4.3.5.218. When grants are made to organizations involved in credit activities (loans, loan guarantees, revolving funds), UNDP requires that the organization have adequate procedures to ensure repayment of the credit it provides. UNDP does not receive repayment itself. The grant is considered a catalyst to help the organization develop19. The rational for the policy of UNDP to provide only grants to intermediaries that demonstrate a sound institutional strength, quality service and outreach and sound financial performance is based on its extensive experience, in supporting microfinance operations, accumulated over the past decades. It was learned that grants to intermediaries or projects, that did not have institutional vision, capacity, policies and systems required to provide sustainable access to microfinance services, resulted in poor performing loan portfolios that gradually disappeared. Providing grants to such intermediaries or projects confirmed being not cost effective. Moreover, it was learned that the poor credit management and/or subsidized interest rates of such intermediaries or projects often damaged the operations of indigenous microfinance operators that apply sound microfinance practices. In addition, it was observed that the improper practices and poor loan portfolio management that caused delinquency problems for poor people diminished their chances to have future access to loans from other sources once these intermediaries and/or projects ended their operations. D. Development Objective The development objective is to develop, in partnership with stakeholders, a diverse and robust financial sector that provides access to financial services to micro, small and medium enterprises. E. Immediate Objectives, Outputs and Activities Indicators/outcomes Objective 1 To increase the capacity and outreach of institutions that provide

microfinance. Output 1.1 Existing microfinance institutions have increased their capacity and outreach Activity 1.1.1 Identify two microfinance institutions that have the potential and commitment to reach sustainability and large outreach

16 UNDP Programming Manual, Article 6.4.6.3, April 1999 17 UNDP Programming Manual, Article 6.4.6.4, April 1999 18 UNDP Programming Manual, Article 4.3.5.4, April 1999 19 UNDP Programming Manual, Article 4.3.5.5, April 1999

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Activity 1.1.2 Conduct an institutional assessment of identified institutions Activity 1.1.3 Review business plans Activity 1.1.4 Prepare a joint capacity building plan for tailor made institutional support Activity 1.1.5 Negotiate performance based agreement Activity 1.1.6 Draft Terms of Reference and contract modalities for TSPs Activity 1.1.7 Identify and recruit Technical Service Providers Activity 1.1.8 Execute capacity building plan Activity 1.1.9 Regular follow-up Responsible parties: MF expert, national staff, Technical Service Provider (TSP) Output 1.2 Commercial banks have increased their capacity and outreach in microfinance

by downscaling their operations Activity 1.2.1 Establish eligibility criteria for support to banks in downscaling pilots Activity 1.2.2 Contract Research Unit to provide Market Research on opportunities for

Downscaling Activity 1.2.3 Inform banks on criteria and potential Project support, and disseminate results of

market research Activity 1.2.4 Request proposals of commercial banks Activity 1.2.5 Investment Committee selects four proposals submitted by banks to the Project Activity 1.2.6 Establish MOU with selected banks Activity 1.2.7 Identify and recruit consultants Activity 1.2.8 Review present product policies and procedures Activity 1.2.9 Draft advice on adjusted policies and procedures Activity 1.2.10 Execute selected pilots Activity 1.2.11 Follow-up on pilots with banks Responsible parties: MF expert, national staff, short-term consultants Objective 2 To make the environment more supportive to microfinance sector

development Output 2.1 A microfinance unit in the National Bank of Angola established and functional Activity 2.1.1 Negotiate Memorandum of Understanding with the Central Bank (BNA)

development of the microfinance unit and division of responsibilities and contribution

Activity 2.1.2 Establishment a microfinance unit Activity 2.1.3 Draft set-up and procedures for the establishment of a data base Activity 2.1.4 Train staff in principles of microfinance Activity 2.1.5 Translate and disseminate information on best practices in microfinance Activity 2.1.6 Organize exchange visits to well-know MFI’s and Central Banks that have adopted regulations for microfinance institutions Activity 2.1.7 Develop standards, transparency criteria, bench marks for the industry in collaboration with microfinance practitioners Activity 2.1.8 Train microfinance practitioners on outcome of activity 2.1.7 Activity 2.1.9 Advise the unit on microfinance policy and regulations conducive to the development of the sector and the appropriate timing thereof. Activity 2.1.10 Train unit staff in aspects of inspection audits of microfinance institutions

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Output 2.2 A national policy and action plan on microfinance sector development approved Activity 2.2.1 Contract the Research Unit to provide a survey on opportunities and constraints for

microfinance sector development Activity 2.2.2 Conduct seminar on outcome of surveys and form a MF sector working-group to

address constraints Activity 2.2.3 Conduct general training courses on key topics for microfinance such as product

development, business planning and financial projections, MIS systems and reporting etc.

Activity 2.2.4 Organize short seminars with keynote speakers on issues related to microfinance sector development

Activity 2.2.5 Organize exchange visits to renowned MFI’s other countries for key stakeholders Activity 2.2.6 Develop an initial draft on vision, national policy and action plan with the MF

working group Activity 2.2.7 Circulate draft to stakeholders for comments Activity 2.2.8 Revise draft based on comments Activity 2.2.9 Hold seminar to discuss, finalize draft and approve draft Activity 2.2.10 Organize round table to mobilize resources for national action plan F. Management Arrangements

Implementing Agency: UNCDF Counterpart: Central Bank - Banco Nacional de Angola (BNA). BNA will manage

the microfinance development unit. The unit will receive technical assistance from the coordinator of the Microfinance component of the Angola Enterprise Program, and specialized consultants as necessary. Financial support for the initial investment to launch the unit, and the operational costs of the first 3 years will be negotiated between the Angola Enterprise Program and BNA.

Investment Committee: To review proposals from MFI’s and Banks, presented by the

microfinance component manager,, and accompany the progress of the microfinance component. This Committee will consist of: representatives from the BNA, the UNDP, other donors (DFID, USAID, World Bank), Chevron, the bankers association, the national microfinance association (RASME), chambers of commerce, and client associations

Microfinance Component Mgrr: Responsible for all investments made under microfinance

component, reporting to Program Coordinator Technical Service Providers: Recruited to provide the technical assistance needed by selected

MFI’s,. Short-term consultants: Various areas.(business planning, institutional assessment, product

development, financial management, MIS, market studies) Total Staff: Microfinance component manager

Local consultants full time (to be recruited and trained as needed) Multiple Technical Service Providers (contracted as required) Secretary Driver

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The successful implementation of this Program requires a strong institutional setting tailored to the specific characteristics of Angola. It should aim at mobilizing and coordinating the various institutions dealing with micro and small enterprises, private sector and civil society organizations. The Program Coordinator is responsible overall for all investments made in the Angola Enterprise Program, and reports to the Steering Committee. Specific responsibilities include the following:

• Coordinate and follow-up the implementation of project activities preparing work-plans and guiding their implementation, including the coordination and supervision of contracts funded by the program.

• Ensure technical guidance for the work, overall coherence of project activities and the circulation of information between the various stakeholders;

• Maintain a transparent and accountable administration of the Program resources. • Ensure overall program monitoring and evaluation. Submit Annual Progress Reports to the

Steering Committee and to the donors and contributors of the Program. • Serve as a key Advocator for the Program and support resource mobilization, communication

and outreach of the program’s strategies and findings. The Steering Committee will include appointed representatives from the Ministry of Planning (MINPLAN), Ministry of Public Administration, Employment and Social Security (MAPESS), Ministry of Family and Promotion of Women (MINFAMU), Ministry of Commerce (MINCOM), Ministry of Finance (MINFIN), Ministry of Industry, Ministry of Fisheries and Environment, Central Bank (BNA), Network of Micro-finance Institutions (RASM), Chambers of Commerce, Women’s Entrepreneurs Association (ASSOMEL), Chevron-Texaco and UNDP.

The Steering Committee will oversee program implementation according to the agreed program objectives. It will ensure coordination among stakeholders, approve annual work plans, and review performance reports, progress reports and audits. It will guide overall program monitoring and evaluation. The Steering Committee will meet semi-annually or as needed.

Execution Arrangements The Program will be executed through the DEX modality. Individual Components of the Program will be backstopped by UN Technical Agencies, who will serve as cooperating agencies of the program: Micro finance - UNCDF; Business Development Services -UNCTAD and may seek inputs and advice from ILO for the Vocational Training component. The program will utilize a variety of delivery mechanisms from the public sector, NGOs, Universities, Church associations, private sector and banking institutions. Other strategic elements of this component will implemented by the coordinator of the Angola Enterprise Fund, or subcontracted to specialized consultants as deemed necessary. G. Reasons for UNDP Assistance UNDP, as a member of CGAP, aims to support initiatives to create sustainable access to microfinance services for the poor and un-banked. The overall goal of the country cooperation framework 1996-2000 on microfinance was to support the implementation of demonstration projects in poor counties with the aim of targeting the poor household, to promote participatory approaches through group formation for rural credit and to provide access to credit for poor house-holds. The present project builds upon the experience gained and aims to set examples which can demonstrate ability to provide sustainable access to microfinance services to poor households.

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H. UNDP Exit Strategy The resources dedicated to the microfinance component of the Angolan Enterprise Program are limited, while the financing needs of Angolan micro, small and medium enterprises are considerable. Therefore resource mobilization is an important element in the design of the program and the size and duration of the program’s investments will depend upon the success of this fund raising effort. With the understanding that resources are finite, it is important that all of the investments made by the microfinance component contemplate an exit strategy, or in other words, envisage a sustainable impact. Capacity building, and cost-recovery will be priorities among the investments selected by the microfinance investment committee so that even when the financing comes to an end, the positive return from the investment continues. Angolan microfinance institutions will be encouraged to expand their operations with appropriate cost structures, to improve their productivity and efficiency so that they may reach an equilibrium point where revenue from operations is sufficient to cover costs. Also the financing and/or cost-sharing of pilots, the Central Bank Microfinance Unit, and the Informal Sector Research Unit will decline over time to provide incentives for these initiatives to seek other funding sources and/or generate sufficient revenue to maintain their operations. It is expected that at the conclusion of the investments of the microfinance component, the Microfinance Unit will continue as part of the operations of the central bank, microfinance support service capacity will exist in Angolan institutions (to be contracted by microfinance institutions when needed), and there will exist a number of self-sufficient Angolan financial institutions which will continue to grow, expanding their supply of products and services to Angolan micro, small and medium enterprises throughout the country. I. Special Considerations The project is associated with several major special considerations that are priorities to the UNDP. It promotes, as a basic premises, capacity building, gender equality, sustainability and self-reliance as important tools towards alleviating poverty and promoting sustainable human Development. J. Risks The risks to the success of the microfinance component of the Angolan Enterprise Program are in the following areas:

i) The Environment ii) The Principal Counterpart iii) The Institutions to be Supported

i) The Environment There is currently very little information available regarding the micro, small and medium enterprise sector in Angola while interviews with clients of microfinance institutions indicate that there are a number of regulations that restrict the economic activity in this sector. The Angola Enterprise Program will prioritize investments to improve the environment for these businesses to prosper, before dedicating significant resources directly to the financial institutions to be supported. The synergies created by the investments being made by the other components of the program will provide other support services for businesses in this sector, working to promote the overall development of the sector. ii) The Principal Counterpart The principal counterpart for the microfinance component will be the Central Bank, Banco Nacional de Angola (BNA). This institution is appropriate in that it is the regulating body for the financial sector, and charged by the government with the responsibility of the developing of financial services throughout the country. However BNA has little experience in this field, and will need technical support, especially at the early stages, before it can work in partnership with the Angolan Enterprise

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Program. Special consideration should be given to the issue of regulation of the sector, as experience in other countries has shown that excessive regulations implemented at an early stage of the microfinance sector’s development, may inhibit the growth of the sector. iii) The Institutions to be Supported Concern must be taken with the institutions that will benefit from the investments of the microfinance component. Due diligence should be performed on the institutions, and where appropriate, the investment strategy, should be based upon the results of an institutional assessment. Care must be taken to broaden the number of recipients of support as much as possible (in such a limited market), to mitigate the risk that weak partners, or failed pilots jeopardize the success of the program. K. Project Reviews, Reporting and Evaluation The following performance targets have been established for 18 months after the commencement of the investments under the microfinance component:

(vii) A functional microfinance development unit in the Central bank. (viii) The prevalence of micro-credit institutions, which target sustainable operational

structures; (ix) The number of micro and small businesses that have loans has increased from

approximately 8,000 to 15,000 (x) The government is implementing improvements to make the environment more

supportive for the development of the microfinance sector based on national policy and action plan to support this sector.

In later years the microfinance component should demonstrate the following results:

(xi) The number of micro and small businesses that have loans outstanding has increased to 40000 after 3 years of the program, and to 60,000 after 5 years

(xii) An environment more supportive to the development of the micro-finance sector is in place, based upon the implementation of a national policy and action plan to support this sector.

Work planning, Monitoring, and reporting The project will be monitored, evaluated and reported upon in accordance with revised UNDP monitoring and evaluation procedures, which will be made available to the project management at the beginning of the project. Project Management at the initial start-up of project activities, and subsequently at the beginning of each calendar year will draw up the project work-plans. It shall be submitted to the Program Steering Committee (PSC) together with the Annual Project Report. An annual audit plan will be developed so that overall project operations will be subject to UNDP standing audit requirements. The Microfinance Development Unit and Informal/ Small Business Research Unit will present a plan of their initial start-up of project activities, and subsequently at the beginning of each calendar year will draw up the project work-plans. It shall be submitted to the Management Committee together with the Annual Report Management Committee of the Angola Enterprise Fund.

Evaluation An in-depth evaluation will be conducted 18 months into the implementation of the project, as part of the implementation of the UNDP Monitoring and Evaluation. This evaluation will be essentially thematic and will include other governance-related activities of UNDP, so as to determine internal synergies in UNDP interventions in this area. The terms of reference for the evaluation will be proposed by UNDP for discussion and approval by the AEP Steering Committee.

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L. Legal Context This project shall be the instrument referred to as such in article 1 of the Standard Basic Assistance Agreement between the Government of Angola and the United Nations Development Programme, signed by the parties on 18 February 1977. The host country’s implementing agency shall, for the purpose of the Standard Basic Assistance Agreement, refer to the Government co-operating agency described in that Agreement.

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ANNEXES

ANNEX 1: Map of Angola

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Annex 2 Budget & Work Plan See attached Excel File

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Annex 3 Organizational Charts

Management Arrangements

STEERING COMMITTEESTEERING COMMITTEESTEERING COMMITTEE

Project CoordinatorProject CoordinatorProject Coordinator

ANGOLA

PARTNERSHIP BOARDPARTNERSHIP BOARDUSA

EnablingEnvironment

EnablingEnablingEnvironmentEnvironment

Business Development

Services(including incubators)

Business Business Development Development

ServicesServices(including incubators)(including incubators)

Vocational Training

Vocational Vocational TrainingTraining

MicrofinanceMicrofinanceMicrofinance

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Annex 4

TERMS OF REFERENCE

Microfinance Component Manager Introduction Chevron Texaco has initiated a partnership with UNDP and the Government of Angola to support the development of the small and micro-enterprise sector in Angola, the Angola Enterprise Program (AEP) The AEP will support vocational training, business development services, (including business incubator facilities) and the development of a microfinance sector. The activities of the program will begin from August 2003, and continue for an initially projected 3 years. A Manager is required to direct the investments of the microfinance component over this period. II. Goals and Outputs: The vision that the program intends to promote is ‘a diverse, robust, micro, small and medium enterprise sector in Angola’. Initially it is important to build consensus around a common vision and a national strategy for the development of this sector. As a result of improving the enabling environment and expanding the supply of micro and small business credit employment will be generated, and incomes will rise, making an important contribution towards the reduction of poverty. The program strategy will include the following components:

► Working Towards an Enabling Environment. A research unit will be established in an Angolan University, or other appropriate institution, which

in partnership with international organizations and experienced researchers will work towards building a broad knowledge base on micro, small and medium enterprises, and issues pertaining to the informal sector. Through the dissemination of information and analysis, the research unit will contribute to informed public policy design. The program will also invest in setting up a microfinance development unit, in partnership with the Central Bank (Banco Nacional de Angola). The staff of this unit will advise policy makers and regulators, centralize information regarding the supply of microfinance, and determine standards in transparency and benchmarks for the industry. Investments will be made in building the capacity of stakeholders, and the coordination of frequent dialog among different groups (public and private sectors). In this way, the Angola Enterprise Program will work towards building a consensus around a medium term vision for the development of the micro, small and medium enterprise sector. Through the implementation of a national strategy, involving all stakeholders, the Angolan economic environment will be made more conducive to investment and growth.

► Expand the Supply of Micro and Small Business Credit

The supply of credit will be increased through the development of the national microfinance industry and downscaling of the commercial banks. The strategy of this component will be coordinated in partnership with the microfinance development unit, located in the Banco Nacional de Angola, which will also receive financial support, and technical assistance from the program. The Angolan microfinance industry will be strengthened through a number of capacity building initiatives and incentives for new entrants. Stakeholders will have the opportunity to visit leading international microfinance institutions and learn from their business models. Experienced microfinance specialists will be contracted to help Angolan microfinance institutions identify the investments necessary to support growth. The best international practices in the development of microfinance will be disseminated in Angola through regular seminars and workshops. The program, together with the microfinance development unit, will coordinate a dialog among

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stakeholders to promote the building of a consensus around a medium term vision for the development of the sector. The program will finance market studies, and seek local investors who could partner with experienced microfinance practitioners in the founding of new Angolan microfinance institutions. Market studies will also be commissioned to examine opportunities for the commercial banks to explore regional markets, and develop new products for small and medium enterprises. The program will invest, together with interested banks, in pilots to explore these opportunities. In this way the supply of credit to the micro, small and medium enterprise sector will expand.

III. The Strategy The strategy of the Angolan Enterprise Program is based upon a venture capital approach, which envisages a number of different phases of development. The initial preparatory stage is expected to take approximately 6 months to one year, during which time the investment committee will focus on selected investments necessary to prepare for the implementation of the individual components, such as market studies, capacity building (regulators, microfinance program administrators etc), seminars to build consensus towards national policy, and the launch of a research unit dedicated to issues related to the informal sector. This will be followed quickly by the launch of pilot projects in each of the component areas, to evaluate the potential of a number of alternate methodologies, delivery mechanisms and partners to create an impact in the Angolan context. While some pilots will require adjustments over time to arrive at an adequate model for Angola, it is expected that a number will begin to produce positive results within 6 months to one year. Based upon reaching certain targets in the preparatory stage which include the preparation of a detailed business plan for each component and demonstrated successes with some pilot projects, a resource mobilization campaign will be undertaken to expand the program investments. While the vocational training, business development services, and microfinance components are relatively independent from each other in terms of investments, goals and development paths, they each very much depend upon the enabling environment component for their eventual success. It is clear therefore that in the first stage of the implementation of the program, the focus of the investments will be in the enabling environment component. As the strategies for vocational training and BDS require a deeper understanding of the needs of different segments of the population, and the capacity of the existing providers, investments will also be made in detailed market studies. Due diligence of identified partners is also a necessary precondition to initiating program investments. The phases of the Angola Enterprise Program are the following:

vii) Start-up viii) Pilots ix) 18 month Review x) Resources Mobilization xi) Expansion xii) Periodic Program Evaluation

► Start-up

In this phase the program staff must be hired, and trained. Systems will be installed, and/or adapted to produce the management reports, and provide the information necessary to direct the program, and demonstrate the transparent, effective use of resources. Key stakeholders will be identified, and a program of raising awareness among this group will begin involving national seminars, courses, international visits and twinning arrangements. The most appropriate host institute for the micro and small business sector research centre will be selected, based upon demonstrated capacity and commitment to the goals of the program. A cost-sharing agreement will be negotiated with this institute, and international expertise contracted to support the launch of research activities (initially with a focus on the informal economy).

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Expertise will be subcontracted to begin the in-depth market studies for the vocational training, BDS and microfinance components. As part of the market studies, potential partner institutions (government institutions, NGOs and private sector firms/banks) will be evaluated in terms of their capacity to contribute to the program. Negotiations will begin to co-finance, together with the Banco Nacional de Angola, a microfinance development unit. Support from international microfinance specialists will be important to support the Central Bank staff in the initial stages of this unit’s development.

The program steering committee will be formed, and early meetings will focus on coordinating the activities of the program with other Angolan development programs (FAS, FDES etc).

► Pilots Pilot projects will be launched to assess the appropriateness of partner institutions, methodologies and delivery mechanisms. In the area of BDS, 2 business centre pilots, based upon the SEBRAE/UNCTAD methodology will initiate activities, one in Luanda, and the other in a province recommended by the market study. An Angolan NGO will begin training in the application of a methodology for raising business skills in populations which have limited education and literacy (ex: CEFE). A pilot incubator will be launched in an Angolan University. Vocational training pilots will be launched, working with public sector, private sector and NGO training providers. A variety of delivery mechanisms such as ´on-the job´, mobile units, apprentice-ships, as well as traditional facilities in a number of geographical locations will be financed. In the microfinance component, commercial banks who wish to explore the potential of downscaling will partner with the fund to co-finance pilots. Technical assistance by microfinance specialists will be provided to selected micro-credit providers to resolve identified constraints to growth.

► 18 month Review After approximately 18 months, an interim review will be conducted to evaluate the program and assess its progress against the established benchmarks. Particular attention will be paid to an evaluation of the pilot projects initiated in the credit, vocational training, and BDS components. Adjustments will be made to pilot design in accordance with the results of this review. Successful pilots will be identified for future replication and expansion.

► Resource Mobilization

It is expected that within 18 months to 2 years from the beginning of the Angolan Enterprise Program, the conditions will be in place for the program to seek further funding to expand the investments, and continue coverage beyond the three-year initial phase. The program should be able to demonstrate clear progress in the following areas: the micro and small business research centre and microfinance development unit functioning inside Angolan institutions, on-going capacity building initiatives with stakeholders, dialog between government, private sector and representatives of civil society regarding issues pertaining to the development of the micro, small and medium enterprise sector, positive results from some pilot projects, transparent program operating procedures. Data regarding these activities together with the business plans for each component will be utilized in a campaign to mobilize resources for the expansion of the program.

► Expansion

Based upon the availability of resources, investments will be made to replicate and increase the successful pilot projects in each component throughout Angola. In this way the supply of services to the micro, small and medium enterprise sector will grow in all the regions of the country. The program, and the institutions financed will be monitored, according to predefined targets.

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Institutions which perform well will be rewarded with further access to funding to allow them to continue to grow rapidly. The most successful service providers will grow, and begin to generate revenues sufficient to cover their costs. Eventually they will not depend upon the financial support of the Angola Enterprise Program, which may direct its investments towards the development of other institutions. Less successful service providers may receive support from the program to identify institutional difficulties, and implement measures to overcome them. Prolonged failure to meet targets will lead to exclusion of the program. Institutional evaluations will be contracted on a regular basis to monitor the development of participating institutions. Cost-recovery strategies will be prioritized to discourage the dependence of participating institutions on program funding. The program staff will be increased according to the level of activity of the program, and available resources. The time frame of the program may be extended beyond the three years determined in the original program design, according to the commitment of the partners, and available resources.

►Periodic Program Evaluation Frequent reviews will be conducted to evaluate the success of the program’s investments in different regions of the company. The results of these assessments will be utilized to adjust the strategy of the program. Positive results may be incorporated into resource mobilization efforts.

The component manager will manage the investments of the microfinance component (and those investments of the environment component which impact on the development of the microcredit sector), and ensure coordination with the investments in each of the other components, in accordance with the phased approach strategy, in accordance with the Program coordinator.

IV. Activities to be undertaken: The microfinance component manager will undertake the following tasks:

Draw up the work-plan for the component at the start-up of activities, and subsequently at the beginning of each calendar year.

Submit the work-plan to the Program Coordinator, who will present them to the Program Steering Committee (PSC) together with the Annual Project Report.

Subcontract Technical Service Providers to implement specific elements of the component. Coordinate and follow-up the implementation of microfinance component activities, and

activities of the environment component that pertain to the development of the microfinance sector (Central Bank Microfinance Development Unit etc) including the supervision of sub-contracts financed by the program.

Ensuring technical guidance for the work, overall coherence of component activities and the circulation of information between the various stakeholders;

Ensuring the financial management and control of the resources allocated to the component, to guarantee transparency and accountability.

Seek potential investment opportunities from banks, and microfinance institutions, and present these to the Investment Committee.

Monitor and evaluate overall component performance. Presentation of annual Progress Reports to the Program Coordinator, Steering Committee, partners and contributors to the Program. The project will be monitored, evaluated and reported upon in accordance with revised UNDP monitoring and evaluation procedures, which will be made available to the coordinator at the beginning of the program.

Ensure coherence and coordination of activities under the microfinance component, with the activities taking place in the other components of the Angola Enterprise Program, taking advantage of synergies where possible.

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The activities specifically related to each output are as follows: Objective 1 To increase the capacity and outreach of institutions that provide

microfinance. Output 1.1 Existing microfinance institutions have increased their capacity and outreach Activity 1.1.1 Identify two microfinance institutions that have the potential and commitment to reach sustainability and large outreach Activity 1.1.2 Conduct an institutional assessment of identified institutions Activity 1.1.3 Review business plans Activity 1.1.4 Prepare a joint capacity building plan for tailor made institutional support Activity 1.1.5 Negotiate performance based agreement Activity 1.1.6 Draft Terms of Reference and contract modalities for TSPs Activity 1.1.7 Identify and recruit Technical Service Providers Activity 1.1.8 Execute capacity building plan Activity 1.1.9 Regular follow-up Responsible parties: MF expert, national staff, Technical Service Provider (TSP) Output 1.2 Commercial banks have increased their capacity and outreach in microfinance

by downscaling their operations Activity 1.2.1 Establish eligibility criteria for support to banks in downscaling pilots Activity 1.2.2 Contract Research Unit to provide Market Research on opportunities for

Downscaling Activity 1.2.3 Inform banks on criteria and potential Project support, and disseminate results of

market research Activity 1.2.4 Request proposals of commercial banks Activity 1.2.5 Investment Committee selects four proposals submitted by banks to the Project Activity 1.2.6 Establish MOU with selected banks Activity 1.2.7 Identify and recruit consultants Activity 1.2.8 Review present product policies and procedures Activity 1.2.9 Draft advice on adjusted policies and procedures Activity 1.2.10 Execute selected pilots Activity 1.2.11 Follow-up on pilots with banks Responsible parties: MF expert, national staff, short-term consultants Objective 2 To make the environment more supportive to microfinance sector

development Output 2.1 A microfinance unit in the National Bank of Angola established and functional Activity 2.1.1 Negotiate Memorandum of Understanding with the Central Bank (BNA)

development of the microfinance unit and division of responsibilities and contribution

Activity 2.1.2 Establishment a microfinance unit Activity 2.1.3 Draft set-up and procedures for the establishment of a data base Activity 2.1.4 Train staff in principles of microfinance Activity 2.1.5 Translate and disseminate information on best practices in microfinance

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Activity 2.1.6 Organize exchange visits to well-know MFI’s and Central Banks that have adopted regulations for microfinance institutions Activity 2.1.7 Develop standards, transparency criteria, bench marks for the industry in collaboration with microfinance practitioners Activity 2.1.8 Train microfinance practitioners on outcome of activity 2.1.7 Activity 2.1.9 Advise the unit on microfinance policy and regulations conducive to the development of the sector and the appropriate timing thereof. Activity 2.1.10 Train unit staff in aspects of inspection audits of microfinance institutions Output 2.2 A national policy and action plan on microfinance sector development approved Activity 2.2.1 Contract the Research Unit to provide a survey on opportunities and constraints for

microfinance sector development Activity 2.2.2 Conduct seminar on outcome of surveys and form a MF sector working-group to

address constraints Activity 2.2.3 Conduct general training courses on key topics for microfinance such as product

development, business planning and financial projections, MIS systems and reporting etc.

Activity 2.2.4 Organize short seminars with keynote speakers on issues related to microfinance sector development

Activity 2.2.5 Organize exchange visits to renowned MFI’s other countries for key stakeholders Activity 2.2.6 Develop an initial draft on vision, national policy and action plan with the MF

working group Activity 2.2.7 Circulate draft to stakeholders for comments Activity 2.2.8 Revise draft based on comments Activity 2.2.9 Hold seminar to discuss, finalize draft and approve draft Activity 2.2.10 Organize round table to mobilize resources for national action plan V Skills and Qualification of Microfinance Component Manager The program coordinator must demonstrate the range of skills and competencies listed below: • Experience with mechanisms which promote private sector development • Experience dealing with questions relating to development of the enabling environment (policy

environment, dialogue with government, etc.) • Experience working in development initiatives in Africa, preferably portuguese speaking

countries. • Experience working on multi-member teams. • Strong writing abilities, and familiarity with UNDP Operating Practices • Experience with delivery of microfinance services in a sustainable manner • Fluency in Portuguese VI Time Frame: The Angola Enterprise Program will conduct investments over a 3 year period, between August 2003 and August 2006, and may be extended, according to available resources. VII Role of the Country Office:

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The UNDP Country Office will provide liaising assistance between the coordinator and key stakeholders in Angola as required. Office space will be provided, together with a driver, and administrational support. The Program will be executed through the DEX modality. VIII Role of UNDP: Individual Components of the Angola Enterprise Program will be backstopped by UN Technical Agencies, who will serve as cooperating agencies of the program: The microfinance component will be backstopped by UNCDF; while Business Development Services will be backstopped by UNCTAD, and ILO may provide inputs and advice for the Vocational Training component. IX Outputs: • Annual Work-plans for activities under microfinance component, those activities under the

environment component that pertain to microcredit development • A coordinated phased implementation of investments under the components • Implementation of Downscaling Pilots with Commercial Banks according to negotiated cost-

sharing agreement • Technical Assistance Provided (either directly by manager or through subcontracted technical

service providers) to Microcredit programs/Institutions. • Funding provided to expand lending portfolios of microcredit programs/institutions. • A common vision shared by the majority of stakeholders regarding national strategy to expand

the supply of credit to micro, small and medium enterprises in Angola • An increase in the number of micro, small and medium enterprises with outstanding loans.

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Annex 5 TERMS OF REFERENCE

International Technical Service Providers

Objective It is widely accepted that one of the biggest constraints to developing microfinance institutions is not lack of capital, but rather a shortage of institutional and human capacity necessary to deliver microfinance services. Guided by this belief, the microfinance component of the Angolan Enterprise Program will increase the likelihood for success of start-up institutions by providing them with a qualified practitioner organization, a Technical Service Provider (TSP) that can set them on a trajectory for success. The technical assistance provided by the TSP will: • Support institutions applying for start-up capital; • Build operational capacity of local microfinace institutions according to proven methodologies; • Assist in the design of an organizational, managerial framework • Offer guidance in the development of the organization’s future microfinance strategy.

Activities The following is a list of activities, some or all of which the technical service provider may be expected to execute within a specific contractual arrangement with the microfinance component of the Angolan Enterprise Program 1. Developing multi-year workplans (with focus on initial 18 months) to be approved by the

Investment Committee. The workplan should clearly define the responsibilities of the technical service provider (TSP) and all proposed contracting arrangements;

2. Identifying the potential of the target microfinance institution (MFIs), based on an examination of its capacity and potential, as well as the mission and commitment to providing microfinance services to low income clients in an efficient and financially viable manner;

3. Provide technical support in the design of products and market development strategies, appropriate to the Angolan opportunities;

4. Developing, in consultation with the microfinance organization, a tailored training program for facilitating integration of best practice;

5. Advising on the establishment and/or strengthening of a board of directors for the local institution and on strategies for resource mobilization;

6. Providing training and workshops for participating organizations. 7. Organizing exchange and exposure visits between participating organizations and other

institutions active in the sector. 8. Providing regular technical assistance and monitoring visits to help develop appropriate

management information systems; ameliorate client selection; improve distribution and collection mechanisms; and build planning, review and problem solving skills. It is envisioned that the TSPs could be permanently attached to a specific institution or if appropriate dedicate a number of days in each month to the microfinance organization, in addition to the regularly scheduled training and workshops;

9. Working with participating organizations, through scheduled visits, to establish quarterly work plans and review achievements;

10. Assuring that recipient organizations have appropriate, reliable and transparent reporting.

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11. Facilitating frequent evaluation of progress of the TSP and the supported microfinance program.

Reporting TSPs will be required to provide quarterly reports to the Microfinance component Manager. The report will include progress on institutional capacity development of local organizations based on key indicators, such as numbers of clients served, operational performance, and portfolio quality.

Expected End of Program Situation Goals will be determined on a specific contractual basis during formulation of the TSP’s workplan. In general the microfinance component of the programme is expected to: i) Firmly launch Angolan Microfinance institutions on the path to operational sustainability; ii) Expand the Supply of financial services to economically active poor people; iii) Disseminate lessons learned regarding the challenges faced in delivering effective financial services to microenterprises in Angola, and specifically the capacity building among those working in the sector. Specifically effective governance within Angolan microfinance institutions will be strengthened through the promotion of well-functioning, qualified boards of directors, and appropriate operational and managerial frameworks. Strategy will be guided by business plans with appropriate funding strategies that support future growth. All Technical Service Providers will operate according to recognized standards of best practice in all areas of microfinace activities.

Minimum Qualification of TSPs Experience with mechanisms which promote private sector development, particularly best

practices in microfinance institutional development Experience working in development initiatives in Africa, preferably the lusophone countries. Strong writing abilities, and familiarity with UNDP Operating Practices Fluency in Portuguese

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Annex 6 TERMS OF REFERENCE

Investment Committee

Objective It will be necessary to form a committee to review proposals from Angolan Microfinance Institutions and Banks presented by the microfinance component manager, and accompany the progress of the Microfinance component.

Composition This Investment Committee should consist of representatives from the following organizations:

• Central Bank (BNA), • UNDP • Other donors as appropriate (DFID, USAID, World Bank etc), • Chevron-Texaco, • The bankers association ^ • The national microfinance association (RASME) • Government Ministries as appropriate (Ministry of the Family and Promotion of Women etc.) • Micro, small and medium Enterprise organizations • And should be chaired by the microfinance component manager.

The investment committee, while containing many of the members of the steering committee should be understood as a much more practical body, which will meet to approve investments, and review the performance of previously approved projects to assess the progress of the microfinance component.

Activities The investment committee will meet on a monthly basis or more frequently according to need, to evaluate potential investments proposed by the microfinance component manager, and review the progress of the microfinance component. The component manager will seek proposals from Angolan microfinance institutions, commercial financial institutions, and Angolan and international NGOs, which will be presented to the committee with recommendations by the microfinance component manager. Investments of the following types, which may be in the form of grants or loans, will be considered by the committee:

• Market Studies (informal sector, micro, small and medium enterprises) for microfinance institutions and commercial financial institutions

• Technical Assistance (contracting Technical Service Providers) for Microfinance Institutions and/or commercial financial institutions, policy-makers and regulators.

• Cost-sharing of pilots for downscaling commercial finance institutions, or new products for microfinance institutions

• Capital for expanding lending portfolios. • Seminars and Workshops which promote the dissemination throughout Angola of

international best practices in microfinance (including translation of international studies and reports).

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• International visits to promote the exchange of information between participants in the Angolan microfinance sector, and experienced microfinance practitioners in other countries.

Priorities The Investment Committee will evaluate proposals according to their potential to build capacity within the Angolan microfinance sector, and contribute directly or indirectly to the expansion of the supply of financial services to Angolan micro, small and medium enterprises. The strategy of the Angolan Enterprise Program is based upon a venture capital approach, which envisages a number of different phases of development. The initial preparatory stage is expected to take approximately 6 months to one year, during which time the investment committee will focus on selected investments necessary to prepare for the implementation of the individual components, such as market studies, capacity building (regulators, microfinance program administrators etc), seminars to build consensus towards national policy, and supporting the launch of a research unit dedicated to issues related to the informal sector. This will be followed quickly by the launch of pilot projects, to evaluate the potential of a number of alternate methodologies, delivery mechanisms and partners to create an impact in the Angolan context. While some pilots will require adjustments over time to arrive at an adequate model for Angola, it is expected that a number will begin to produce positive results within 6 months to one year. Demonstrated successes with some pilot projects will contribute towards a resource mobilization campaign which will be undertaken to fund future expansion of the programs investments. The priorities of the investment committee with regard to the selected investments will therefore evolve over time according to the strategy of the Angolan Enterprise Program, and available resources.

Monitoring Simple indicators should be utilized to provide clear and transparent monitoring of the performance of the specific investments and the microfinance component in general, e.g. Number of outstanding loans, quality of loan portfolios, operational performance of financial intermediaries etc.

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Annex 7 TERMS OF REFERENCE

Central Bank Microfinance Unit

Objective The microfinance component of the Angolan Enterprise Program will support the establishment of a national microfinance unit, which will function as a focal point and coordinator of microfinance development in the country. The preferred location of this unit is in the Central Bank, Banco Nacional de Angola, due to this institution’s responsibility to stimulate national financial sector development. Representatives of the Central Bank expressed their support for this strategy and offered to dedicate employees to, and finance the maintenance of such a unit. The manager of the microfinance component of the Angolan Enterprise Program will work with the employees of the unit, and provide technical assistance as necessary, to develop their understanding of the evolving needs of the microfinance institutions around the country. Activities With the support of the microfinance component manager, and Technical Service Providers (TSPs) where needed, the microfinance unit will conduct the following activities:

• advise policy makers and regulators. It is important that the government develop internal capacity regarding issues related to the sector to support policy making, and eliminate excessive regulation.

• compile a central data base with the results of regional micro-enterprise sector studies (showing constraints and opportunities for small, micro and medium enterprise development) and information regarding clients to facilitate the development of a credit bureau. With this tool, new investors will reduce the costs involved in market research and the launch of new microfinance institutions.

• promote sector studies (evaluating constraints and opportunities for micro, small and medium enterprise development)

• promote information dissemination (including translation of international texts), There is limited information currently available in the Portuguese language regarding best practices in microfinance. It will be important to translate international material and distribute with appropriate forums

• develop national capacity in support services to the microfinance sector (auditing, accounting, legal, IT). Initially international expertise will be required to support the development of these services, but through a coordinated program of partnering local professional institutions with international specialists, Angolan capacity will be developed.

• Define microfinance sector standards with regard to transparency of information and performance bench marks. It is important to encourage the exchange of information and experience within the domestic microfinance sector, to replicate successes rapidly and learn from failure. This must be stimulated through an industry standard, and systematic transparent reporting, enforced by the central bank.

It is essential that in the early stages of the Angolan Enterprise Program, the microfinance unit supports the process to build a consensus around a national action plan for the development of the microfinance sector. As part of this process the microfinance unit will prioritize in the first 18 months of the program:

• the contracting of research to understand the needs of the micro, small and medium enterprises,

• the strengthening of microfinance networks, • training and exchange visits for key stakeholders,

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• workshops and seminars to discuss strategic issues, and • resource mobilization to finance the expansion of the sector.

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Annex 8

STRATEGY FOR FINANCIAL SECTOR DEVELOPMENT

Introduction The strategy for financial sector development focuses on deepening the market penetration of the commercial financial system to guarantee long-term access to financial services for all the population in a given region or country. The strategy is based upon the stimulus of the development of the financial sector as a whole, whereby the expansion of financial services for the lower segments of the market is understood in the context of the development of an integrated financial sector. In order to develop the financial sector in an efficient and effective way, it is necessary to involve all the stakeholders, and work towards building a consensus around the strategy for the expansion of the sector. It is important to create a forum whereby government, donors, practitioners, investors and customers can discuss the challenges involved in the expansion of financial services, and determine the necessary investments within the framework of a consensus among these stakeholders. Based on the results of this forum, the government can formulate a policy, with clear targets for the investments, in accordance with available resources. The sector development approach targets the eventual integration of microfinance services into the commercial financial sector of the region. Sustainable microfinance institutions will over time be brought into a conducive regulatory environment, and expand their services based upon a business strategy that is commercial, both in terms of the funding of the institution, and the market-driven financial services that it offers. The success of the financial sector development approach is ultimately measured by the ability of the commercial financial sector to meet the demand for financial services from the lower income segment of the population in a profitable way, thereby eliminating the need for further subsidies. Strategy The Financial Sector Development Approach depends upon the following elements:

i) The Diagnostic ii) Development of A Common Vision iii) Implementation of an Action Plan

i) The Diagnostic It is essential that the Strategy for Financial Sector Development be based upon a rigorous diagnostic of the market for financial services within the target region or country. The demand for financial services must be understood, particularly among the lower income segments of the population which are typically excluded from many sources of finance. The institutions which offer financial services should also be analyzed, in terms of the products that they offer, and the clients that they serve. Special care should be taken to include all distribution mechanisms for financial services, from the typical financial institutions such as banks and insurance companies which offer a broad range of products, to shops which offer credit for purchases, and wholesale suppliers of goods which frequently offer credit to small businesses to purchase their stock. It is also important to investigate which informal mechanisms for financial intermediation have developed within lower income communities, in the absence of traditional financial services. Figure 8.1 shows a graphical representation of a market diagnostic for financial services:

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Figure 8.1. A Diagnostic of the Market for Financial Services

Banks ↓ ↓ ↓

Downscaling

↑ ↑ ↑ ↑ ↑’ ↑ ↑ ↑ ↑

Expanding microfinance institutions

↓ ↓ ↓

O

utst

andi

ng A

ve. L

oan

Size

(%

of G

DP/

cap)

100% 10% 1.5% 0.5%

Number of Clients

Figure 8.1 demonstrates a situation common in less developed countries, where the banks are focused on the higher income segment of the population, and their services have a high degree of penetration in this market (emphasized by the darker shading of the pyramid). The lower income segments of the population pyramid are served by specialized microfinance institutions, although the penetration of the market is very limited (hence the lighter shading). An analysis of this nature serves to highlights the gaps in the market, where there are significant numbers of potential clients, with limited access to financial services. The strategy for the development of the financial sector must be based upon a clear perception of these gaps in the supply, and on the institutions best suited to penetrate these sectors of the market. In the simple example of figure 8.1, the recommended strategy would be to promote the downscaling of banks, and the expansion of the microfinance institutions, as indicated by the arrows. ii) Development of a Common Vision Once a market diagnostic has been conducted to understand the market for financial services, it is important that the results of the diagnostic are discussed by all the stakeholders in the financial sector; representatives of the clients and potential clients, banks, microfinance institutions, and government. The challenges facing both the clients, formal and informal micro and small businesses, and the financial institutions which serve them, must be understood if policies to stimulate their growth are to be implemented effectively. The strategy for the development of the financial sector in a particular region or country should be a product of a consensus reached among these stakeholders, so that each market participant is committed to their role in expanding the offer of financial services. A number of investments in diverse areas must be contemplated, if there is to be a sustainable expansion of financial services, including reforms of the regulatory framework at the frontier between formal and informal businesses, and the financial sector law. Particular focus is given to the development of a healthy, growing microfinance sector, as this is usually the segment of the financial sector which is least developed. In order to determine what support could be given to optimally stimulate the development of the microfinance sector, it is instructive to review how this sector has developed in countries that have a mature microfinance industry. Although each microfinance sector has followed its own unique path, it is possible to separate the development of the sector into 4 typical phases which exhibit common characteristics: a

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start-up phase, an expansion phase, a consolidation phase and an integration phase, as shown in figure 8.2:

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Figure 8.2. Stages of Development of the Microfinance Sector OUTREACH (% of population with a loan) Start-up Expansion Consolidation Integration The start-up stage is characterized by the introduction of microfinance activities as experimental pilot projects. New products are developed and tested in the market. The growth of the loan portfolio of the industry is slow. The challenge is the development of human resources, trained in a methodology adequate to the local market reality, capable of delivering credit products that ensure good repayments. During this stage, awareness is built among regulators, and the public at large, that micro and small business entrepreneurs can be creditworthy. Some pilot projects will fail due to a low level of repayments, while others gradually discover techniques that function in the local context. In regions where microfinance institutions are not within the law (due to their small size they are often initially considered as non-financial institutions and are therefore not regulated by financial law) successful pilot projects, operating at the edges or beyond the legal frontier, often convince the authorities to support such activities due to the improvements that they have achiev in the standard of living of poor households, employment generation and economic development. In the expansion stage, the successful microfinance institutions (MFIs) concentrate on expanding the scale of their operations. The success of their business model allows them to replicate activities and expand to new regions and, in doing so, capture a significant share of the potential market. Often the products and business model of these market leaders are replicated by other microfinance operators. The challenge in this stage is resource mobilization, usually from donor organizations and the public sector. While the growing microfinance institutions begin to experience economies of scale and the largest are increasingly able to cover their costs with income generated from interest and fees, the majority of institutions continue to depend upon grants and subsidized loans to finance their expansion. Inevitably the increased scale of operations requires investments in institutional strengthening, particularly in the areas of governance and information systems. By the end of the expansion stage, typically the most successful microfinance institutions have captured a large part of the potential market for their services. In the consolidation stage, the most successful MFIs begin to focus on their overall sustainability. The challenge in this stage is the strengthening of the institutions so that they may continue to grow in a healthy fashion. The growth in the loan portfolio of the microfinance sector slows. Typically this is accompanied by the formalization of institutions so that more and more governance, loan procedures,

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human resources, information systems etc are organized in much the same way as commercial financial institutions. The microfinance sector as a whole usually follows this trend, by establishing industry norms. Subsidies to the sector begin to diminish in order to avoid distorting institutions and market prices. As a consequence, MFIs are required to further increase their productivity and efficiency. Competition among the market players creates incentives to design more flexible demand-oriented products. Some MFIs expand into new markets such as the small business sector20, rural areas, or lower income groups, and/or broaden their range of services to include savings and transfers. In the integration stage leading MFIs become an integral part of the formal financial sector, offering a range of demand oriented products for the lower segments in the market. They are regulated by the central bank in the same way as other financial institutions. The challenge in this stage is for the microfinance sector to access capital from a broad range of commercial sources (deposits from the public, loans and equity) to further finance growth. Instead on drawing upon public funds and subsidies, MFIs now begin to contribute though the taxes paid by the financial sector. More and more MFIs become indistinguishable from other financial institutions, as they expand and broaden their market penetration, while a number of commercial banks downscale in pursuit of the returns achieved by the MFIs. It is essential that stakeholders develop a common vision at to where on the development curve the microfinance sector is currently positioned (as highlighted in the sector diagnostic), and therefore what are the policy options available to optimally stimulate the development of the sector. iii) Implementation of an Action Plan Based upon the consensus among stakeholders regarding the diagnostic of the financial sector, and a common vision as to the development path that the expansion of the sector should follow, an action plan can be implemented to stimulate the expansion of the supply of financial services to underserved segments of the population. Financial institutions should be encouraged to enter new markets, penetrate new regions and downscale their activities. Detailed market studies need to be commissioned to examine the commercial potential of new products and markets. Pilots should be initiated to test products and delivery mechanisms. Successes should be replicated in new regions, to consolidate the expansion of the supply of financial services throughout the country. The development stage of the microfinance sector will determine the focus of the investments intended to promote the development of the sector: START-UP STAGE Experience in other countries shows that for the microfinance sector to advance from the start-up phase into the expansion phase there are the following 3 minimum requirements.

i) Successful Pioneers First, it is important that leading microfinance institutions emerge which have adopted business models appropriate to the local market conditions. These pioneers implement successful business plans which demonstrate the potential profitability of the sector. Their management applies sound microfinance principles and is committed to reach profitability and scale. Often at this stage a number of banks also risk a downscaling strategy and discover that they can generate profits by banking lower segments of the market. These leaders show their peers that people and enterprises at the lower end of the market are bankable.

ii) Enabling Environment A second important precondition is improvements to the enabling environment, the legal and physical infrastructure that supports the development of the microfinance sector. It is essential to reduce repressive legal, regulatory or political policies which interfere with the

20 To support access to microfinance for micro and small businesses often translates into job creation for poor people that prefer to be wage employed rather than to be self-employed

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starting up and growth of small businesses e.g. a financial law that stipulates an interest rate ceiling below the level required by microfinance institutions to cover their costs. Dissemination of useful information is essential to improving the enabling environment: “best practices” in microfinance, research regarding the informal sector, entitlements for micro-entrepreneurs (e.g. government benefits, tax exemptions), performance indicators for microcredit institutions etc. A strong enabling environment implicitly includes a relative absence of “bad practices” i.e. National policies which offer credit in a supply-oriented manner (targeting specific sectors or populations), at below market interest rates, tend to inhibit the development of a sustainable microfinance industry. Microcredit programs with low portfolio quality often undermine the financial discipline of communities, and produce a growing pool of low-income defaulters who will not be eligible for subsequent loans, distorting the market limiting the ability of microfinance institutions to penetrate the market.

iii) Investors A third key feature is the existence of investors interested in the microfinance sector. During the start-up phase when investment in the sector is more risky, due to the lack of institutions with a proven track record, multilateral donors21 usually provide grants to support capacity building. However the funds available to these institutions are limited. As the microfinance sector develops, domestic investors will have to direct capital towards successful institutions if they are to grow to a significant size.

EXPANSION STAGE The typical pre-requisite for the advancement from the expansion stage to the consolidation stage is the availability of support services to the microfinance sector. It is important that there exists a local supply of accountancy, advocacy, auditing, information technology, and consultancy services which understand the particular needs of the microfinance sector. While international providers may be hired in the early stages of the industry, local capacity is essential if the sector is to be able to build sufficient management capacity in the areas of governance, and information management to develop large financial service institutions, which can profitably serve the lower income segments of the population. It is also necessary that a certain degree of transparency regarding the performance of MFIs is institutionalized in the MFI sector, to strengthen the recognition of problems inherent in the rapid growth of institutions at this stage of the sector’s development. CONSOLIDATION STAGE In order for the microfinance sector to advance to the integration phase it is essential that a regulatory framework conducive to the development of microfinance services within the traditional financial sector, is in place. The development of such a regulatory structure normally takes place when a critical mass of MFIs are willing and able to integrate into the formal financial system, but this may be stimulated through a process of dialog between stakeholders as discussed in the previous section. A Comparison with other Strategies The financial sector development strategy can be compared to the two typical approaches which are adopted by policy makers, and international donors, to increase the access of the lower income segments of the population to financial services:

i) The Project Approach.

21 Many bilateral and multilateral donors are a member of the Consultative Committee to Assist the Poor (CGAP). CGAP promotes adherence to sound microfinance principles and stresses the importance of aiming at sustainability and outreach.

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ii) Institutional Development Approach

i) The Project Approach. This strategy is the most simple of all, describing a policy whereby a microfinance project is financed, with the goal of quickly expanding services to a target population. While this approach depends little upon independent agents, as the policy maker or donor can act directly or in a partnership to set up the project, and is the most rapidly implemented and easily controlled strategy, it has a number of drawbacks. Firstly an approach based upon stimulating specific microfinance projects usually focuses on simply expanding the number of clients that are receiving credit. These clients tend to be perceived as beneficiaries of the project which limits the adoption of more commercial practices based upon demand driven products. With the focus on outreach, the challenge of promoting a sustainable supply of services tends to take a secondary role. ii) Institutional Development Approach In the institutional development approach, policy makers or donors focus on the performance of a particular institution or group of institutions over a time period. The financial performance and the loan portfolio quality of the institution or institutions is monitored, and investments are made not only on portfolio expansion, but also capacity building and the reduction of operating costs. In more advanced projects, the funding of institutions is related to their financial performance, in an attempt to promote improvements in productivity and efficiency. This strategy is more challenging to implement than the project approach, in that it depends upon the development of independent capacity in the participating institutions, which takes time to grow. However the advantage is that the long-term sustainability of these institutions is clearly prioritized. In both these approaches, the environment is seen as an exogenous variable or risk, which cannot be influenced by the investments in the strategy. Difficulties faced by MFIs and other financial institutions in expanding financial services to micro-businesses due to limiting regulations, an inappropriate legal environment, a lack of supporting infrastructure (information regarding the demand, business development services etc) may continue to stifle the development of the microfinance sector. There is also a tremendous challenge implicit in both approaches in the design of the exit strategy i.e. envisioning the end of the policy. In the project approach, the beneficiaries of the microfinance services inevitably become dependent upon the services offered by the project, while the success of the project itself may often discourage the growth of other suppliers servicing the same target market. Thus unless the project can make a huge leap, and be spun off as an independent sustainable MFI, the closure of the project means simply a return to a situation where the target market has no access to financial services. In the institutional development approach, it is the financed MFIs which tend to become dependant upon the subsidized funding that the policy makers or donors offer. If during the time period of the project the financed institutions are unable to grow sufficiently, and improve their efficiency to a point where they can cover their own costs, the end of the project will simply lead to a collapse of the institutions which supply microfinance services. ii) Financial Sector Development Strategy The financial sector development approach is based upon the premise that microfinance services will over time become an integrated part of the financial system. It is essential that a strategy to stimulate the development of the financial sector be founded upon a consensus regarding the current position of the financial sector: the demand for financial services from all segments of the population, the supply of financial services, the institutions which offer these services, and the gaps where the demand is not served by supply. Rather than exclude the financial sector, or certain client groups from the strategy, and work only with new institutions or projects, it is important that all willing stakeholders (the government, central bank the suppliers and customers of financial services) are involved in a dialogue to determine the strategy to expand financial services. Through dialogue, a shared vision on the optimal future of the sector is developed and a national policy may be designed to put this vision into practice. A coordinated series of investments in areas such as improving the enabling environment, downscaling commercial banks, launching pilots with new products in new markets, supporting specialist microfinance initiatives will all contribute to a sustainable expansion of the financial sector.

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The following table is a summary of the comparison between the three approaches discussed in this section: Figure 8.3: Summary of Comparison between Strategies

Criteria Project Approach Institutional Development Approach

Microfinance Sector Development Approach

Vision Many among the

entrepreneurial poor need credit to start or expand a business. The provision of credit will allow them to invest in their businesses, and increase their quality of lives.

Low-income populations could improve their quality of life through access to financial services. Through the development of sustainable microfinance institutions, low-income customers will have access to finance services

Low-income people could improve their quality of life through sustainable access to financial services. To optimally address this demand, the capacity of the microfinance sector should be developed as an integrated part of the financial sector.

Objective Reduce incidence of poverty among targeted beneficiaries through the direct provision of financial services

Support microfinance institution to develop sustainable access to financial services for their clients.

Provide sustainable access to financial services for low-income people throughout the country

Policy Funds should be disbursed within time period, to provide financial services to fixed minimum number of people.

Institutions financed should adhere to sound microfinance principles, and attain institutional sustainability while expanding outreach.

It is important to develop an environment which supports the development of a competitive microfinance service industry as an integrated part of the commercial financial system.

Strategy 1. Set up revolving fund or project component 2. Select beneficiaries and disburse funds 3. Collect repayments to disburse as new loans

1. Select institution 2. Conduct institutional appraisal to decide on funding and support 3. Based upon results of appraisal and ongoing performance monitoring, finance portfolio growth and capacity building.

1. Conduct financial sector diagnostic 2. Instigate process to develop a consensus regarding results of diagnostic, and process to expand the provision of financial services 2. Design national strategy and action plan 3. Implement investments according to national strategy.

Direct Beneficiaries

Project beneficiaries Microfinance Institutions

All stakeholders

Performance indicators

Cumulative number of beneficiaries reached during the project period.

Operational and financial sustainability; Portfolio at Risk

Integration of microfinance sector into the commercial financial system; Demand-supply gap; Existence of an infrastructure, supportive to financial sector development; Cumulative taxes received from microfinance sector/ cumulative subsidy

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provided to the sector (sector development pay out ratio)

Advantages - Ease of implementation

- Quick results - Targeted

Implementation - Direct control - Low requirement

for support from experienced specialists.

- Ease of implementation - Increased sustainable

access to financial services for poor and low-income customers of MFI

- Strong emphasis on local capacity building

- More coordinated approach

- Involvement of all stakeholders

- Increased sustainable access to financial services for poor and low-income customers.

- Focus on integration. - Broad inclusive policy

mitigates the risk of funding bad practices.

- Strong emphasis on local capacity building

Disadvantages - Not sustainable - May undermine

other initiatives with same target market

- Limited Accountability

- Low cost effectiveness

- Potential for targeting financially unviable clients, and increasing poverty

- Limited capacity building

- Risk of unfavorable environment that may inhibit the ability of clients to benefit from financial services.

- May distort market - Introduces donor

preferences for non-profit institutions.

- Donors may become tied to “their” MFIs, providing selective support to the detriment of other institutions.

- Risk of unfavorable environment that may inhibit the ability of clients to benefit from financial services

- Risk of unfavorable environment that could inhibit growth of MFIs

- Potential lack of participation of Central bank and government

- Performance indicators are of higher priority than outreach

- Takes time to develop managerial capacity in the institutions financed

- Need for support from experienced specialists

- A complex approach involving the building of a number of partnerships

- Individual strategies of donors and other policy makers may conflict with the development of a consensus, and common strategy.

- Risk of one interest group monopolizing the process (inevitably the strategy collapses to project or institutional development approach)

- Takes time in early stages to produce tangible results.

- Need for support from experienced specialists

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Position of UNCDF UNCDF/SUM’s core competencies lie in the provision of

(i) technical and financial support for the formulation and implementation of national policies and strategies on financial sector development for poor and low-income people

(ii) technical and financial support for the development of sustainable retail microfinance operations and

(iii) training for donors that are active or plan to be active in the field of microfinance. UNCDF/SUM is well positioned to support the development of microfinance sectors around the world through the flexible and diverse products that its specialized team of microfinance experts offer, working in close collaboration, from the head office and the field, with the 134 UNDP country offices, to mobilize partnerships for maximum impact. This competency of SUM was recognized during a Donor Peer Review of UNDP, organized by CGAP in November 2002, which concluded that “UNDP has privileged access to the excellent technical services of the internationally recognized, dedicated microfinance unit of UNCDF”…and…”numerous donor agencies send their staff to UNCDF/SUM training sessions”.22 A specialized microfinance unit acting as the policy and technical advisor of the UNDP group, UNCDF/SUM provides training, technical and policy advice and management support to UNDP at the central, regional and country level. The unit’s focus is to: (i) support strategic partnerships in the preparation and implementation of national strategies for the development of sustainable pro-poor financial services as an integrated part of a financial system, (ii) support microfinance operations that aim for sustainability and (iii) disseminate sound microfinance principles. The potential of the UNDP-group to support the development of financial services for poor and low-income people is high given its reputation, credibility, vast network, neutrality and mandate. UNCDF/SUM is committed to support program countries which promote sustainable microfinance as an integrated part of the financial system, acting in partnership with diverse organisations such as the UNDP, CGAP, multi-lateral and bilateral donors, development banks, private sector enterprises and NGOs. The private sector in all market economies will continue to be the driving engine for future economic growth. Formal and informal micro and small enterprises typically constitute the backbone of the private sector of developing countries, and substantially contribute to GDP and employment. Economic policy cannot hope to deliver sustainable benefits unless it improves the business environment of this target group. UNCDF/SUM believes that a coordinated approach to building the microfinance sector, as an integrated element of the formal financial sector is the most effective approach to reduce poverty and ensure that aid resources are effectively used to attain the Millennium Development Goals by 2015.

SUM’s Mission Statement The mission of the United Nations Capital Development Fund’s Special Unit for Microfinance (UNCDF/SUM) is to contribute to the reduction of poverty and the achievement of the Millennium Development Goals by 2015 through participating in the development of sustainable microfinance and its integration into the financial sector of countries throughout the developing world. This approach focuses on eventually reaching the ultimate goal that poor and low-income people will have sustainable access to microfinance. Given the present state and development of the microfinance sector, UNCDF/SUM believes that a coordinated strategic approach to building microfinance as an integrated part of the formal financial sector is the most effective approach to reduce poverty and to ensure that aid resources are used effectively to achieving the UN Millennium Development Goals. 22 Tackling Aid Effectiveness from the Top: Microfinance as a Test case: UNDP and UNCDF Letter to Management, page 3-4

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This approach is based on developing a national policy and national strategy, based upon a shared vision that focuses on the eventual integration of microfinance into the formal commercial financial sector. The strategy targets the development of local capacity, strengthening the institutions operating in the financial sector, improving the policy, legal and regulatory environment, and investing in the provision of support services (funding mechanisms, audit and legal services, networks, training facilities, credit bureaus, etc.) and other environmental factors which are necessary for financial services for poor and low-income people to become a permanent and unsubsidized part of the formal financial system.

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Annex 9 List of documents and Reports Consulted

Bourns, N., Gallagher, T. Schoeman, J.H. Institutional Appraisal, Development Workshop Angola

Microfinance Programme, DAI, November 2002 Bourns, N., Gallagher, T. Schoeman, J.H Development Workshop Angola Microfinance Programme,

Draft Business Plan 2003 – 2007 IPC, Microfinance Bank of Angola (MBA), Rationale for a Microfinance Bank, October 2002 IPC, Enterprise Bank Angola, Concept paper for Global Development Alliance Fion de Vletter, 2002, The Angolan MicroEnterprise Sector The Economist, Angola Country Report Ministry of Planning, Estratégia Interina de Redução da Pobreza (IPRSP)

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ANNEX 10 Participants in Diagnostic

Conducted by Peter Kooi & Terence Gallagher

Institutions Person Visited Tel.

Address

Name Job Title

Ministry of Family & Women’s Promotion

(MINFAMU)

Sra. Candida Celeste

Minister 311171 311728

Largo 4 de Fevereiro –

Palácio de Vidro, 2° Andar

FDES – Fundo de Desenvolvimento

Economico e Social

Dr. Amândio Esteves, Dr. João

Quiquipa & Dra. Londa

Soki

Manager, Economist & Head of the

Department for Monitoring and

Inspection of Projects

371062 370484 370863

Rua Rainha Ginga, n°83,

1°Andar Caixa Postal

n°1366

National Bank of Angola (BNA)

Dr. Rui Mengueis de Oliveira

Manager of Banking

Supervision

339767 391743

Avenida 4 de Fevereiro

National Bank of Angola

Dra. Ana Paula

Coelho

Deputy Manager of Banking Supervision

339767 09232228

0 337725 (Home)

Avenida 4 de Fevereiro

Bank of Commerce and Industry - BCI

Dr. José Aires

Commercial Director

331637/331433

331562

Rua Rainha Ginga n°73

Bank of Commerce and Industry - BCI

Dra. Ivone de Sousa Carvalho

Economist 331133 092 -

400017

Rua Rainha Ginga n°73

Banco Sol Dr. Sebastião Lavrador

Manager 440330 440215

Rua Rei Katyavala n°110/112

Banco Africano de Investimento - BAI

Dr. Carlos Duarte

Director 335749 335127

Rua Major Kanhangulo n°34

64

Institutions Person Visited Tel.

Address

Name Job Title Banco Africano de

Investimento - BAI

Dra. Valentina

Filipe

Rua Major Kanhangulo n°34

Banco Africano de Investimento -

BAI

Dr. Oscar Mata

Director 091- 511232 092 -

408439

Rua Major Kanhangulo n°34

Banco de Fomento e

Exterior BFE

Dra. Graça Pereira

Director of Enterprises

334179 339198

Rua Alfredo Troni n°15, 7th

floor Edifício BPC

Development Workshop

Sra. Josée Lemieux

National Program Manager

448371/448266

448377

Rua Rei Katyavala 113

C.P.3360 Care International Mr. Julien

Baskin Micro- Finance

Project Supervisor

371021/337077

092614544

Bairro Palanca Rua E casa n.1

Care International Sr. Douglas Steingberg

Project Director 445121/44040

092614544

Alameda Manuel Van Dunen,

n° 330

Fundo Lwini Dr. Alfredo Ferreira

Executive Secretary

448231 Rua Marechal Broz Tito n°11

R/C SNV (Lubango) Sr. Jan

Montfort General Director 61- 22907

61 - 30099 C.P. 120

Lubango – Huíla USAID Sr. Robert

Hellyer

Mission Director 399518 Rua Kwamme Nkrumah, 31

Edifício Maianga USAID Sra. Gail

Spencer Program Officer 399518

091504208

Rua Kwamme Nkrumah, 31

Edifício Maianga DFID Mr. Martin

Johnson Director 334582/83

392998 Rua Diogo Cão,

n.°4 ChevronTexaco Sr. Robert

Scharnell President 392646

091 512153

Avenida Lenine, n.° 77

65

Institutions Person Visited Tel.

Address

Name Job Title

ChevronTexaco Sr. Timóteo de Almeida

Senior Government

Affairs Representative

Public and Government

Affairs

392646 091

507265 09233041

8

Avenida Lenine, n.° 77

ChevronTexaco Sr. Mamadou Blondin Beye

International Relations, Regional

Co-ordinator

+44(0)2077194467

1 Westferry Circus

London E 14 4HA

ChevronTexaco Dra. Lwena Pegado

Communication and Special

Projects Coordinator

392646 091

500643

Avenida Lenine, n.° 77

ChevronTexaco Sr. Simon Lowes

Advisor to the Chairman

392646

No specific location

FADDME Forum Ad Hoc de Desenvolvimento

de Micro Empresas

Sra. Marinela

Cerqueira

Rede Mulher Dra. Emilia Fernades

Director 449513 Avenida Hoji ya Henda n° Henda

n°21,1°Dt° Federação das

Mulheres de Angola

Sra. Maria do Carmo

Nascimento

President 091-500749 446742 443088

Largo do Kinaxixi, n° 14.

3rd floor ( last door)

Banco Comercial Português

Dr. Victor Hugo de Carvalho,

Dra. Henda Ducados &

Sr.Wim Alberts(WB)

Managing Director, Deputy

Director, HQ Staff on Mission

for FAS III

397446/397392

397397fax

Rua Rainha Ginga, n°83

Coca Cola Richard Helmore

Director, Novos Negocios

38.12.12 Rua Ngola Kiluange nr. 370