case study sef tcp

8/8/2019 Case Study Sef Tcp

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I. Context

A. Socio-economic Overview

Any discussion of the history, politics or economy of South Africa begins with

Apartheid. For much of the 20 th century, industrialist policies enforced economicmigration and deprived rural villages of local investment, the ability to accumulateassets and access to credit. Large producers and business hubs prospered on the backsof cheap labour and an insulated banking sector, while remittances typically coveredonly food and housing needs in rural villages. In this environment, the SmallEnterprise Foundation (SEF) was founded in 1992 to combat the severe lack of economic opportunities among the rural poor in the Limpopo Province, in thenortheast corner of the country.

Ten years after the first democratic elections South Africa remains one of themost economically polarised countries in the world. Although South Africa isclassified as an upper-middle income country (source) , the Limpopo Province has aHuman Development Index equal to that of neighbouring, drought-strickenZimbabwe, which ranks 121 st in the world. The dividends of steady economic growthsince exchange rate shocks in _____ have not resulted in significant commercialinvestment in rural villages. In many cases, men are forced to follow the Apartheid-era patterns of economic migration to find work in mines or on farms.

With the unemployment rate at over 60% in rural villages self-employment presents the best hope for the poor and the very poor to generate a sustainable income.Yet, without access to credit or savings most small businesses cannot build up assetsto withstand the shocks of accidents, disease, natural disaster or other urgent financialrequirements. The chicken-and-the-egg dilemma of extending credit to poor

populations without credit history or collateral is as old as micro finance itself.However, following the fall of Apartheid, the new government attempted to

provide incentives for lenders to cover the risk of reaching the previously unbankable.In the raft of legislation passed to spread equality and opportunity following the fall of Apartheid the government exempted micro credit providers from complying withinterest rate ceilings and other regulatory requirements. Unintentionally, the measuresenfranchised the usurious practices of informal moneylenders in rural villages and ledto a mushrooming of the now formal moneylender industry. Among poor and very

poor populations, who have little access to information and are often illiterate, theeffect was disastrous on their chances of emerging from poverty.

Currently, (Parliament) is circulating draft proposals of the National Credit

Bill , which would regulate the practices of all micro credit providers and, crucially,set an interest rate ceiling that would apply to the moneylender industry. The damagehas been done, though, obliging the poor and the very poor to regard promises of collateral-free credit with wariness and suspicion. The difficulty of establishing loan

products in this compromised micro credit environment is compounded by SouthAfricas high labour costs, crime, and poor transportation infrastructure andunaffordable IT services. Bernadette Moffet, a micro credit specialist working for theWomens Development Bank in South Africa, calls South Africa the most expensive

place to operate a micro finance institution (MFI) in the world.As in many countries of sub-Saharan Africa HIV/AIDS threatens economic

development in South Africa, especially in poverty-plagued rural villages. According

to the UNAIDS Global Report in 2002, Adult HIV prevalence rates have risen higher than thought possible in this region, with over one third of adults currently infected in


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a number of countries. Reliable statistics are difficult to collect in the LimpopoProvince because of the persistent societal stigma attached to the disease and the

prevalence of tuberculosis resulting in misdiagnosis or falsified records. In March2005, SEFs HIV/AIDS and gender empowerment partner, the Rural AIDS &Development Action Research Programme, estimated that over 16 percent of the

population in SEFs target areas are infected with the disease (Paul Pronyk source) .Among its 25,000 clients SEF loses ____ clients to what official death certificatesalmost universally label as natural causes. (For more information on SEFs effortsto combat HIV/AIDS see SEEP Network case study: Efforts to Address the Impact of AIDS on Clients, Households and Enterprises )

This unique set of economic and environmental challenges remnants of theApartheid-era economic structure, an emboldened moneylender industry, high

business costs and the HIV/AIDS epidemic affect

The unique economic and environmental challenges in South Africa require that asustainable MFI must set clear goals and streamline its structure in order to reach the

poor and very poor.

- Add definitions of poverty/poverty line in South Africa-

B. Purpose of Intervention

Understanding the choices SEF made in developing Tshomisano CreditProgram (TCP) and mapping its future requires a full grasp of its mission and its owndefinition of success. From the day that founder and Managing Director John de Witformed SEFs first group the goal was to eradicate poverty. This is a single-minded

pursuit that drives SEF to target the poorest and most vulnerable in the villages of theLimpopo Province, subordinating its performance on common microcredit

benchmarks. In distinguishing SEF from its brethren, Ted Baumann wrote in hisinstitutional analysis that, Other MFIs are committed to reaching the very poor, butmost accept a balance between poverty outreach and sustainability that leaves out thevery poorest. (Preface) Against the better recommendations of many experts, SEFdid not accept a balance that altered its original goal in any way.

The allegiance underpinning this mission rigidity is to eradicating poverty by

attacking vulnerability at a deeper level than strict income security. In working withthe very poor the need to develop social capital is clear and stands as a prerequisite tofinancial independence. In the words of SEF MD de Wit, The very poor often havelow self-confidence and social skills, do not participate in community structures, andhave weak social networks particularly in times of trouble. (16) While recognizingthe need to build social capital among the very poor SEF also realizes that the processis not technical, nothing like building a house or even teaching a class.

Direct, linear transfers of material or information do little to create lastingimprovements in household stability, human investment (e.g. health and education)and community involvement. Adding another new-age nail in the commercial coffinof microfinance, SEF understood its focus to be, fundamentally, on purpose, process

and people not strategy, structures and systems. In short, the very poor all of whom are black in South Africa have been told what to do for their whole lives.


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Call it dependency or vulnerability; TCP clients must overcome its psychological burden before achieving financial independence.

This focus is not readily expressed by citing SEFs double bottom line of poverty outreach and financial sustainability, but its wrapped up in the themes of this paper and the development of TCP. Facilitation, participatory targeting, a belief in

the psychological roots of extreme poverty, subsidization and integration are thethemes that reflect SEFs allegiance to building social capital. Admittedly, creatinglasting improvements in the lives of the very poor presupposes that a lasting programexists. Thus, SEFs methodology is shaped by the demands of efficiency, scale and

portfolio quality. In 1992 they gave shape to SEFs original Microcredit Program(MCP), using the Grameen Banks group lending model, fortnightly meetings, smallloan sizes, mandatory savings, short repayment schedules, strict repayment terms andfocusing minimally on loan products not training or education initiatives.

When SEF disbursed its first MCP loans in 1992 it expected high transactioncosts and small loan sizes to pre-select only the poorest in each village. Certainly,SEFs experience during the first two years of operation confirmed the existence of widespread rural demand for microcredit. Borrowers almost exclusively operated

businesses involved in small-scale trading or hawking, personal services (e.g.hairdressing) and producing specialty goods. These borrowers were thirsty for alending program that minimized the heavy interest payments demanded bymoneylenders, which cut into their already-slim profit margins.

As a result of its dual economy, South Africas efficient and expanding formalretail and manufacturing sectors prevent microenterprises from competing in value-added markets and quickly accumulating capital. Most small-scale traders and

producers survive by transporting goods to remote areas, through convenience purchases and as manufacturers of occasional needs like school uniforms.

By the end of 1994 MCP had 2,000 total clients, but, worryingly, most of these came to SEF because they operated a business or had some business experience.In essence, SEFs lower interest rates and non-profit status primarily attracted clientsthat had been forced to take out loans from moneylenders. For them, high transactioncosts and small loan sizes were a price they were willing to pay. It is very possiblethat they continued to use loans from moneylenders to cover the remainder of their credit needs. By this time, SEF had established policies promoting client-ledgovernance (oversight?????) through groups and centres, and begun to form itsmanagement structure by organizing Fieldworkers into branches and designating aHead Office for administrative operations. (See Appendix ______ for currentstructure.)

Nevertheless, SEFs single-minded pursuit of eradicating poverty, beginningwith the poorest, led it down a two-year path of re-evaluation and experimenting with poverty-targeting methods. SEF had assumed that high transaction costs and smallloan sizes would serve as a self-executing targeting mechanism. A Christopher Dunford would later conclude though, Loan size is often much more of a reflectionof the institution offering the loan than of the characteristics of the borrower. (6 from Antons bibliography) Studies conducted by SEF during 1995-1996 showedthat only 30%-40% of MCP clients could be characterized as very poor by an incomemeasure, meaning they were living below half of the poverty line.

Without explicitly targeting, SEF was not reaching the most vulnerable, previously unbankable very poor, but it needed to understand why. Former SEF

Development Advisor (??????) Anton Simanowitz described the hazards of relyingsolely on market research in trying to refocus MCP. At SEF we heard from clients,


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we need larger loans, we need shorter terms. We need these different products.What we were hearing was not the voices of the very poor, we were hearing thevoices of the less-poor people in the program. (28) Simanowitz could have addedthat the reason why the voices of the very poor werent heard was because they had

been largely intimidated and excluded from joining MCP. By attempting to include

the very poor in a program with their better-off peers SEF was inadvertentlyreinforcing their lack of confidence. Better-off clients were reluctant to guarantee theloans of inexperienced group members and staff had a reflexive tendency to excludethem.

The latter phenomenon arose from staff incentives that rewarded Fieldworkerswith larger portfolios and less repayment problems all harder to achieve whenworking with the very poor. The very poors own sense of inferiority and thereluctance of their better-off clients to welcome them into groups and centres isexplained by SEF MD de Wit.

What weve heard from literature from all over the world is whatwe found in our own case, and through hard experience. The poorer peoplesee who goes to your program, and they just say, This program is not for us; it is for those better off people. And then very often the wealthier

people, maybe just the less poor, intimidate the poor, simply by saying,This meeting is for serious people. Here we have to be serious about

business. Somebody who is only selling a few vegetables is not seriousabout business. Poor people already have pretty low self-esteem, but youadd a few comments like that, and they leave. So the presence of the non-

poor unfortunately did scare away the poor. And thats why we have to gofor an exclusive poverty focus. (53)

C. Description of target group/clients/members

In designing TCP from 1995-1996 SEF returned to its single-minded pursuitof eradicating poverty by targeting the very poor. Following the lead of GrameenBank (source?????), SEF realized that it needed to explicitly target the very poor.Given their lack of confidence and the reluctance predisposition of their better-off

peers SEF decided that it needed to develop a separate program for the poorest, which became TCP. Comparing their needs to its experience with MCP clients, SEFidentified the factors of poverty that reinforced vulnerability with its emphasis on

building social capital through group lending and facilitation.In 2003, Catherine van de Ruit and Julian May conducted an analysis of SEFs participatory poverty-targeting method and found that it presented a comprehensiveand consistent view of poverty, including:

Alienation from the community and government: The poor wereseen to be isolated from the institutions of kinship andcommunity as well as from the structures of government.

Food insecurity: Participants saw the inability to provideinsufficient or good quality food for the family as an outcome of

poverty. In particular, households where children went hungryor were malnourished were seen as living in poverty.


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Crowded and poorly maintained homes: The poor were perceived to live in overcrowded conditions and in homes inneed of maintenance. Having too many children was seen as acause of poverty not only by parents, but by grandparents andother family members who had to assume responsibility for thecare of children. By contrast, wealth was regarded as havinggood houses that were well maintained and durable.

Usage of basic forms of energy: The poor lacked access to safeand efficient sources of energy. In rural communities the poor,

particularly women, walked long distances to gather firewood.In addition, women reported that wood collection increases their vulnerability to physical attack and sexual assault. Wealth wasseen to be using more convenient forms of energy, especiallyelectricity, and owning appliances both to reduce effort and for entertainment.

Lack of adequately paid, secure jobs: The poor perceived lack of employment opportunities, low wages and lack of job security asmajor contributing factors to their poverty.

Fragmentation of the family: Many poor households werecharacterized by fathers or children living apart from their

parents. Households were sometimes split over a number of sitesas a survival strategy (May et al . 1997).

For SEF MD de Wit, the differences between the very poor and most MCPclients were tangible.

If you look at the housing, then the clients in the microenterprise program generally live in brick structures, and very often these are plastered. The clients from the poverty program live in mud buildings.When it comes to schooling, youll find that about thirty percent of thechildren of the poverty program dont go to school at all. It very, veryseldom happens that children dont go to schools in the poverty programis generally because the parents cant afford a school uniform for thechildren When it comes to food, youll find that the clients in the

poverty-focused program dont eat meat very often They dont buyvegetables; they generally collect vegetables. They eat moke and fishand such things very seldom. The clients in the other program eat

meat quite often, and they do buy moke, they do buy fresh vegetablesAnd then children are the best indication of poverty by far. Theres asubstantial difference between the children in the one program versusthe other. Youll find that in the poverty program the children are dirtyand are wearing dirty clothing, and theyre not changing their clothingvery often. And the main reason is because their parents cant affordsoap. And obviously they cant afford more clothing as well.

II. Description of Methodology

In meeting the triple bottom line of working with the very poor SEF confrontsthree main challenges in designing and initiating TCP. (Cite?)


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A. Summary of Design Concepts (Describe generally in the present tense notchronologically)

First, SEF must package an attractive loan product to potential clients while

incorporating additional business training, support, discipline and confidence- building. As mentioned earlier, the requirements of the triple bottom line oftenconflict and, in this case, SEFs client services are constrained by its commitment tofinancial sustainability. The high-cost micro finance environment of South Africadictates that SEF employees cannot invest significant amounts of time in monitoringand advising each individual client. Yet among the very poor, who are starting new

businesses and often adopting accounting practices for first time, the potential for business failure or misuse of funds is especially severe.

How does SEF ensure that TCP clients have the support, discipline andconfidence to succeed? The group methodology developed in MCP harbours aninherent and irrepressible advantage over models that provide intensive supervisionand assistance to individual clients. The advantage is the strength of the clientnetwork developed by group cooperation and centre governance. Business lessons,crisis assistance, accounting checks and centre-enforced discipline are all examples of the benefits of the connections cemented by SEFs group methodology.

By recognizing and promoting this educational support system SEF plays afacilitation role in its interactions with clients. (The benefits of this approachstrengthen each leg of its triple bottom line.) Every time clients join SEF, apply for aloan, withdraw savings or make a payment, their peers first vet their actions. Playingthe role of facilitator allows employees to reach more clients and improves SEFsfinancial performance. More importantly for the future of clients and their families and the fate of rural villages SEFs commitment to facilitation pushes clients toassume leadership roles, enforce responsible business practices and rely on each other for support. In a country scarred by Apartheids debasing effects on the psyches of the very poor this may prove to be SEFs lasting legacy. (Transition)

What structures and policies does SEF use to ensure effective groupcooperation and centre governance? As a Grameen Bank replication, the mostfundamental element in the TCP structure is the group, consisting of five members.Ben Nkuna, SEFs Operations Manager and an architect of TCP, emphasizes that,(quote about importance of group formation). Prospective clients are responsiblefor establishing groups made up of individuals that know and trust each other, but arenot family members. Additionally, group members are expected to be close in terms

of business experience, age level and live near each other. These terms ensure thatgroup members easily relate to each other and avoid potential problems with bullyingwithin the group. Placing the responsibility for recruitment on clients helps to certifythat they are committed to assuming ownership over their group and to SEFs strict

procedures.Once clients have gathered five potential group members they begin

preliminary training with the DF assigned to the area. The substance of the trainingdoes not cover specific TCP procedures, business practices or accounting principles.Recognizing the absolute importance of group solidarity, the DF begins training byasking group members to share their goals and fears and discussing SEFs missionand experience assisting the very poor. Over four separate meetings the DF learns

about each clients business plans, explains the general purpose of loans and checks tomake sure that each individual has discussed their participation in TCP with their


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families. Crucially, the DFs role is to foster dialogue between potential groupmembers and their families. Any reluctance to do so is taken as a sign that the groupmust be broken up and reformed with individuals who are more comfortable witheach other.

After three sessions of preliminary training the Branch Manager (covering six

to ten areas) administers a first test of the group members, which covers their knowledge of each other and their business plans. Then, the DF embarks on four daysof formal training to educate group members about TCP policies, procedures and their responsibilities as clients. Topics include: Loan terms, loan sizes, disbursements,repayments, the group savings account, vetting of business plans and loanapplications, dispute mediation, options for financial crises and the purpose of thecentre. Each topic carries assignments that group members must complete ashomework, and training cannot continue unless each step is completed to the DFssatisfaction. During formal group training, the DF is encouraged to test groupmembers in order to gauge their level of commitment to TCP. This is preparation for the final step in training.

For final group recognition the Branch Manager meets with the group againand conducts a test of their knowledge of TCP and their responsibilities. Althoughthe meeting may take place under a tree or in a clients garage the atmosphere is thatof a final exam. Understanding that an uncooperative group will pose real problemsdown the road, the Branch Manager is not obliged to pass the group unless he or shecan vouch for its quality. In fact, as of May 2005 the pass rate across TCP stands at

____%.The importance of group cooperation is presented by the guarantees,

accounting checks and centre-enforced discipline used to minimize SEFs risk in providing credit to the very poor. SEF does not require collateral to join either MCPor TCP, requiring that group members guarantee the repayment of each others loans.When working with clients that often have no sources of regular income thisrequirement presents a fracture point in poor quality groups. A tight-knit group,however, will intervene before non-payment becomes an issue by recognizing thesigns of a struggling member. Because groups must independently carry outrepayment and savings transactions with two signatories at local bank branchesmembers have a clear window into each others finances. SEF mandates that eachmember must save at least R10 ($____) at every bimonthly centre meeting.

Overseeing and reinforcing each groups cooperation, repayment and savingsis the centre, located in one of a DFs four to six villages and typically consisting of five to ten groups . Run by a Centre Chairperson, Treasurer and Secretary, the

bimonthly centre meetings represent clients most formal involvement in TCPoperations. They are a venue for sharing business advice, checking groupsrepayment and savings, vetting new loan applications, imposing small fines on late or absent members and dealing with problems that individual groups cannot solve. Eachcentre writes its own constitution, code of conduct and functions independently of theDF, who only intervenes when consulted and to ensure that SEF procedures and

policies are correctly followed. Notably, centre meetings may not begin unless fully80% of its members are present, and must be rescheduled if this threshold is notreached.

In group training, during centre meetings and, especially, within individualgroups, the DF plays the role of facilitator to the greatest extent possible. This

organisational goal utilizes client networks within groups and centres to advise,


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monitor and support individual clients, satisfying each leg of SEFs triple bottom line.

B. Process/Steps in Implementation

The second challenge in meeting the triple bottom line of working with thevery poor is to identify and reach them. As cited above, the purpose in designing TCPwas to create a parallel program to serve the needs of very poor clients who wereintimidated and reluctant to join the original MCP. Yet, according to MD de Wit, thechallenge involved more groundwork than simply hanging up an Open for Businesssign. A well-intentioned NGO could design the perfect loan product for a givencommunity, offering ideal repayment terms, but the very poor would never walk inthe door because they dont believe that they can succeed on their own. (source) Ineffect, this is what de Wit did in 1992 when he designed MCP in hopes of enticing thevery poor with confidence-building building measures like small loan sizes, nocollateral requirements and group lending.

(Add SEF Pg. 31) Fundamentally, the problem of reaching the very poor sprung from their lack of access to or experience with financial markets formal or informal. Whereas MCP clients came to SEFs doorstep to avoid the usuriousrepayment terms of moneylenders, the very poor had little or no experience with evenindigenous forms of financial services, such as stokvels. (define in footnote) TCP hadto create demand; a controversial conclusion in the poverty outreach versussustainability debate. In MD de Wits words, SEF had to reach out to the very poor and crack the fragile eggshell of defeatism and low expectations. (source)

With a renewed sense of purpose SEF still had to answer the question: Whatdefines the very poor? The World Bank/Microcredit Summit Campaign(source ???/de Ruit Pg. 21) has endorsed an international definition of the poorestas people that live on less than $1 a day, adjusted for the purchasing power of localcurrency. The rationale being that success in poverty outreach can only be measuredand monitored reliably if common definitions of the very poor are agreed toworldwide. The importance of this goal for the sake of accountability andeffectiveness should not be taken for granted. As an early member for theMicrocredit Summit Campaign, SEF embraced this pursuit of a statistical, absolutedefinition of a poverty line. Listed earlier were characteristics that separated MCPclients from the non-participating very poor during SEFs early years. Theseindicators provided measurable and relatively consistent benchmarks for objectivelydefining the very poor.

(Use MSC papers on website and from Johns files) Externally-drivenmeasures of poverty center on the idea that individuals consumption decisions provide the clearest window into their well-being and income patterns. As with the$1 a day line, individuals that fall below a consumption level defined by the cost of an essential basket of goods are considered to be very poor. (Note: often ahousehold unit must be divided into individuals) For a short-term, general census of

poverty across countries and continents, a consumption-based measurement bestidentifies the poorest. However, in designing TCP, SEF needed a longer-term pictureof individuals willingness to engage in economic activity to identify those thatstruggled with more intractable psychological barriers to independence, not temporaryshocks to their consumption decisions and income patterns.

Still tied to a quantitative focus, SEF looked for other observable indicatorsthat would give insight into povertys infectious grasp on the very poor. It is


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important to remember that as a relatively new MFI embarking on a new commitmentto poverty outreach SEF was constrained by its limited staff, data-gatheringcapabilities, villagers worries of fraudulent schemes and the high-cost environmentof South Africa. Therefore, when SEF launched TCP in ______ it turned to a simplehousing material survey to identify potential clients.

The advantages for an experimental, cost-sensitive poverty outreach programwere clear; and the differences in the availability of new housing materials since thefall of Apartheid presented an indicator sensitive to income patterns. Whenhouseholds generated income above strict subsistence levels, they often replaced their mud-walled or aluminium slat homes with stronger structures made of cement or

brick. TCP field staff only had to walk through a village and survey the prevalence of different types of housing materials to identify struggling households.

(Expand if possible on the length of SEFs use and more on effectiveness of housing test) This visual test of poverty gave SEF a better-targeted pool of potentialTCP clients than the self-selecting MCP pool. At the time MD de Wit presented thefindings of an internal study of the housing material survey method to the

________(year) meeting of the Microcredit Summit Campaign, concluding that it wasseventy percent accurate in identifying the very poor. He added: But one thing weknow for sure is that the clients we are getting from this test are very, very differentfrom the clients we were getting before we introduced this test (i.e. in MCP).(source)

In this initial pilot phase, TCP field staff began reporting inherentshortcomings in the housing material survey method. As an absolute measure of

poverty the surveys suffered from an opaque but recurring lack of information, just as pure-consumption-driven measures of poverty do. Specifically, the housing materialsurvey missed households in need of SEFs (attention?) because their better-qualityhousing materials either hid their total dependence on family members or beliedfinancial crises that had taken place since the house was built such as the death of a

primary earner. Operations Manager Ben Nkuna, one of the architects of TCP,reflected that, ________________. (source)

Conceptually, the outcome of the housing material survey did not fit SEFsvision of its role in development. By identifying the very poor without their input andthen knocking on their doors to announce their eligibility for loans without collateralrequirements, SEF was bypassing its commitment to involve clients as stakeholders inthe program from the moment SEF entered each village. SEF was ignoring its

philosophy of facilitation for the sake of expediency and absolute, but flaweddefinitions, and establishing itself as the driver of change and opportunity. SEF was

not pushing the community to define what poverty meant in its most personal, localcontext, and to take ownership of its poorest members. ________ years/months after SEF hung its Open for Business shingle on

TCP, it

C. Method of Measuring Results

If the first two challenges for developing TCP can be defined as operationalisinga philosophy for fighting poverty and reaching the very poor, then the third and final


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challenge is monitoring, assessing and improving the impact of the program.Although this is the most elusive task, an internally-driven approach to measuringimpact on poverty outreach and the success of individual clients complements thesustainability of the program. How SEF has designed a system to measure the resultsof TCP has as much to do with how SEF has answered the first two challenges.

Focusing on a facilitation philosophy as opposed to a more educational one and a participatory approach to defining poverty pushes SEF to incorporate TCP clients in judging and improving the programs effectiveness.

Impact monitoring, assessment and improvement begins at the individual leveland is conducted by groups and centres without SEFs direct guidance. Echoing atheme of this case study, the group lending methodology provides built-in checks that

both reflect the fortunes of clients and offers the first opportunity for intervention.Foremost is the group guarantee of members loans, which gives individuals theincentive to monitor other members businesses and repayment records. Reinforcingthis responsibility to track and, in times of need, to intervene with struggling membersis SEFs requirement that all group members must have finished repaying their loans

before the group can embark on a new loan cycle. The group savings accounts, inwhich multiple members must verify deposits and withdrawals, ensures that groupshave a window into the financial stability of their members. Experienced clientsknow that their fellow group members savings rates are a useful proxy for their shared risk. (quote)

As highlighted earlier, centres provide the first line of oversight and enforcementof SEFs policies and procedures, performing a built-in impact monitoring,assessment and improvement function. Every two weeks these group-led structurescheck repayment records and savings accounts, record attendance and serve as aforum for resolving intra-group disputes that have the potential to push groupmembers to abandon their shared responsibilities and risk. Additionally, centresdebate and vote on recommended loan sizes for members of groups that are applyingfor a new loan cycle.

These methodological characteristics of TCP dont provide indicators that can begraphed and tracked, as financial statistics do; however, they are arguably moreimportant to improving the programs poverty outreach. Further, they adhere toSEFs commitment to a facilitation role by utilizing the very poor to detect problemsin groups and centres. (Internally-driven)

Of course, a client-led approach to ensuring poverty outreach is susceptible towidespread fraud, disillusionment, or, at the very least, a misunderstanding of responsibilities especially when working with the unconfident very poor.

Therefore, SEF has crafted the role of Development Facilitator (DF) to inform, assistand, when necessary, censure centres and groups in their educational and oversightroles. At centre meetings the DF ensures adherence to SEFs policies and proceduresand duplicates the centres accounting functions, creating a second record of repayments, savings and attendance, which is sent to the Head Office.

Working with individuals and groups, the DF performs more traditional impactmonitoring and assessment functions. After PWR has identified the very poor,interested individuals have formed groups and joined TCP, SEF tracks their povertyscore using impact evaluation forms. The process is participatory with the DFinterviewing clients after they complete each of the first _____ loan cycles. Theindicators used to compile clients poverty score, listed in Table ____ (Kate Pg. 79),

are relative rankings, reinforcing SEFs commitment to allowing individuals to define poverty in their own local, personal context.


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III. Results

The results of TCP have changed both the lives of very poor women and their

families in the Limpopo Province and SEFs long-term goals. The impact of TCP on poverty outreach is demonstrated by experiential evidence from TCP clients anddistinguished by three types of impact. Likewise, the success of TCP in achievingsustainability redefined SEFs plans for fighting poverty. Most importantly for the

purposes of this case study, the results of the first ten years of TCP affirmed SEFsassumption about the difference between economically-active individuals and thevery poor.

In November 2004 SEF achieved financial sustainability with its dual microcreditand pro-poor lending programs. (Insert Q?) This is remarkable for two reasons: First,many leading researchers and writers on microfinance have largely dismissed theviability of sustainable programs that target the poorest. (Academic quote) Not onlydoes SEFs subsidization strategy challenge this accepted wisdom, but TCPs successin the treacherous microfinance environment of South Africa casts a favorable lighton prospects for replication in other countries. Second, SEFs separate programscamouflage the telling fact that, operationally, MCP and TCP are identical. Subtractthe PWR process and the use of poverty scores from TCP and SEFs facilitation role,loan products and policies are no different for relatively-business savvy MCP clientsand vulnerable TCP clients.

This finding cannot be underemphasized: the only difference between MCP andTCP clients are the psychological barriers that burden the very poor. Further, these

barriers can be overcome by pushing the very poor to assume ownership of their futures and the success of their peers. And, contrary to the approach of Asian MFIslike BRAC (spell out), the very poor do not need alternative repayment schedules or interest rates in order to expand their businesses, fulfill their loan contracts andimprove their families well-being, simultaneously.

Some may question if clients can discern the benefits of loan products and policies that match their better-off peers. (Stories and quotes fromTCP Women)

Of course, it is important to qualify and quantify the impact that theseempowerment-rich stories demonstrate. TCPs success in poverty reduction can bedistinguished by three types of impact: Income, Social and Economic. These threedimensions of a pro-poor lending program summarize its performance on the first legof the double bottom line poverty outreach. As Ted Bauman defined it in his SEF

Monograph, This positive impact is a combination of building strong businesses toensure reliable and adequate income to meet household needs, and the development of assets to protect this income and reduce vulnerability. (Pg. 21)

On the first level of impact clients income, savings and assets SEF relies primarily on information gathered by centres and submitted by DFs in loanapplications. (Need: Current stats on growth of TCP clients business value, loan size,savings and assets employment/equipment)

Supplementing these financial indicators, which are updated after each loancycle, SEF commissioned a two-year TCP Impact Survey of clients in eight villages,from 1998-2000. Undertaken at a crucial point in TCPs development and expansion,the study covered four consistent indicators of poverty and demonstrated that TCP

clients had made reliable improvements in income and savings. As Table _____ shows, regular increases in average business value after each loan cycle allowed TCP


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covered six distinct stages in which SEF strove to calibrate its growth with the needsof the very poor.

____ 1996 December 1998: Stage One marked the launch of TCP as a pilot program. In early 1996, SEF deployed eleven Fieldworkers (later

christened Development Facilitators) to ____ villages, using the housingmaterial survey method of identifying the very poor. A year later, SEFdeveloped and implemented its own poverty-targeting tool, PWR.Correspondingly, SEF refocused TCP staff on their poverty outreachresponsibilities, retraining them to place their highest priority on buildingcohesive and responsible groups and centres. Although this emphasis onstrengthening networks slowed recruitment, SEF quickly decided toexpand TCP in 1997. With plans to also add staff to MCP and the HeadOffice, SEF hired and trained 22 new employees.

However, in early 1998, SEF realized that the numbers of TCPclients had stagnated, despite Fieldworkers success in recruiting newgroups. A drop-out rate hovering around 35% and total clients of less than1,000 led SEF to delay its expansion plans for TCP and shift all newly-trained Fieldworkers to MCP. Nevertheless, the average loan sizedisbursed to TCP clients grew from R409 to R556 during this period,contributing to an 82% increase in loan interest income for SEF as a wholefrom 1997-1998. In an attempt to understand if this growth was reducingthe vulnerability of the very poor, SEF launched the TCP Impact Survey atthis time.

As SEF dealt with TCPs high drop-out rate and prepared torenew expansion plans, its prescriptions were noteworthy because theyonly concerned how TCP policies and procedures had been applied nottheir basic suitability to the very poor. This faith in SEFs group lendingmethodology derived from the years spent perfecting MCP and earlyanecdotal evidence that the very poor were held hostage by psychological

barriers to financial independence. Without these guides and thefinancial benefits of subsidization TCP would have been vulnerable tocostly methodological experimentation in trying to balance povertyoutreach and sustainability.

January 1999 March 2000: Stage Two improbably transformed TCPfrom a pilot program to the centrepiece for SEFs future plans. By 1999,

SEF realized the dividends of the hard work that TCP staff had put intodeveloping PWR, understanding how to motivate the very poor and building their individual portfolios. In its third year, TCPs steady growthand resiliency reinforced the assumptions that SEF had made about thenature of extreme poverty and the capabilities of the very poor.

Largely because it takes Development Facilitators three years to recruitand retain enough groups to reach a full portfolio, TCP staffs

performance indicators registered a marked improvement in 1999, beginning with total clients reaching more than 1,500. Reflecting aconsistent trend, the average loan size in TCP had also jumped to morethan R800 by 1999. Owing to the success of TCP clients in their third,

fourth and fifth loan cycles, these larger loan sizes helped to encourage


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SEF that the returns of 1999 could be replicated while maintaining its highrepayment rates.

Subsequent projections led SEF to declare that it would reachfinancial self-sufficiency in 2003. Meanwhile, SEF expected TCP tocover its own expenses before 2003, relying on returns from the even

larger loan sizes in MCP to pay for an increasing portion of administrativeand development costs. In a bold declaration of its confidence in the very

poor, and the market they represent, SEF announced its intention to phaseout MCP and become a pure pro-poor lender when it reached financialsustainability. Results of the TCP Impact Survey, completed in 2000,reinforced the anecdotal evidence that TCP performance indicators servedas a reliable, regular proxy for poverty impact.

To reach the sale necessary for financial sustainability SEFundertook its delayed expansion of TCP during 1999-2000. SEF set thestage for rapid growth by extending TCP from eleven to 28 Fieldworkersin _____ branches. Nonetheless, in the midst of this expansion push SEFdeclined a R9 million grant from the South African Department of SocialDevelopment, which would have been tied to the governments ownoutreach targets. The decision reflected SEFs commitment to retainingfull control over its methodology and performance targets, and echoed therecommendations of microfinance researchers that document thedamaging effects of misaligned subsidies. (Source H & M, Pg ? addquote?)

April 2000 March 2001: Stage Three professionalized TCP and set iton an equal footing with MCP, providing for its rapid growth and theresulting destabilizing effects. Prior to 2000, TCP had operatedindependently of SEFs main program, MCP. As a pilot, TCP hadfunctioned with senior management exercising hands-on control intraining staff, vetting groups, establishing centres and resolving individualgroup disputes. With its decision to recast itself as a purely pro-poor lender when it reached sustainability SEF sought to maintain efficiency bystreamlining TCP operations into the systems set up for MCP. Operations

policies and procedures, administrative systems and staff incentives werestandardized across both programs. In devolving direct control over day-to-day operations, SEF management enabled TCPs expansion andunavoidably erected operational barriers to soothing the symptoms of

unchecked growth.SEFs push for financial sustainability by 2003, combined withthe grafting of MCP systems onto TCP operations, pressured staff to focuson profitability beyond poverty outreach. TCP retained its proven abilityto target the very poor by virtue of PWR; however, incentives aimed at

portfolio growth encouraged staff to value group quantity above qualityand neglect signs of financial distress or discord within groups.Immediately, group recruitment rose dramatically with the deployment of 17 new Fieldworkers in TCP, climbing by 105% on the year to March2001. A further increase in the average loan size in TCP to R884 despitethe influx of new, inexperienced clients cast a foreboding shadow on the

future of TCP staffs performance indicators.


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Another telling sign of profitability pressure and mission driftarising from sustainability projections and the standardization of TCP wasa week-long staff strike in September 2000. Wage demands unsheathedTCP staffs concerns over performance-based pay and indicated that theyhad not fully bought into SEFs long-term plans. According to Ted

Baumanns institutional analysis, SEF management believe that the strikewas a positive experience, however: staff became more serious abouttaking responsibility for SEFs performance. (7)

Although TCPs self-sufficiency ratio brightened in 2000 thanks to new clients and larger loans SEF realized that the greater returns from rapid growth heralded greater risk for its most vulnerableclients and its double bottom line. Indeed, monthly arrears skyrocketedfrom a running average of about 12 groups to 187 groups in March 2001.Traditionally, SEFs write-offs always amounted to less than 1% of

portfolio outstanding over the course of any given year, but, in 2000, itworryingly began to rise. Even clients that paid back their loans on timeand in full felt the pressure of SEFs focus on profitability, manifested inTCP staffs inattention to group quality and push for larger loans. Hence,the dropout rate in TCP began to rise from 19% in July 2000, ultimatelyreaching 31% in July 2001.

Clearly, SEFs longstanding goals of poverty outreach andsustainability had come into conflict, begging the question: Would SEF

be forced to pare back its goals on one to reach the other?

April 2001 June 2002: Stage Four answered this question as SEF,characteristically, chose to re-immerse itself in its double bottom line by

pushing back its sustainability projections in order to focus on repairing its portfolio quality. SEF recognized that the solutions to repayment problems and dropouts would be realized and implemented mosteffectively by groups and centres. Motivating these structures to tacklerepayment problems and bolster their education responsibilities requiredthe leadership of TCP staff. SEF realigned staff priorities by introducingnew incentives aimed at performance indicators like arrears and dropouts,adding an innovation budget for staff projects in each branch and

providing additional training for staff that neglected clients businessdifficulties. Again, SEFs approach is noteworthy for its striking lack of methodological experimentation and its belief in the very poors ability to

succeed with structures designed for their better-off peers.To ensure that clients were not pressured into large increases inloan size, SEF accompanied these staff-based changes with a moreconservative loan size policy for centres and Fieldworkers to use. Thesequality-focused adjustments reversed the average loan size trend in TCP,leading to a fall in principal outstanding from R9.1 million to R8.0 millionfor SEF as a whole. This drop reflected a move towards equilibrium andsustainability, as evidenced by SEFs steady growth to nearly 3,000 totalclients by June 2002.

Underscoring how long it took to reengineer TCP in favor of portfolio quality, write-offs continued to rise to 2.4% of principal

outstanding during Stage Four a high SEF has come nowhere near since.Meanwhile, in 2002, SEF sought to improve the secondary impact of TCP


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on the well-being of clients and their families by launching the RuralAIDS and Development Action Research Program (RADAR), a pilotcombining HIV/AIDS education and support with SEFs microcreditoperations. Partnering with the Health Systems Development Unit of theUniversity of Witswatersrand, SEF justified the added transaction costs

imposed on clients by RADAR after taking into account the detrimentaleffects that HIV/AIDS imposes on clients ability to save and build assets

especially the very poor.

July 2002 June 2004: Stage Five quickly validated SEFs quality-focused adjustments, allowing SEF to lock-in its efficiency gains andredesign its commitment to and expansion of TCP. Despite thedestabilizing effects of rapid growth during 1999-2001 and thesubsequent cool-down period of 2001-2002 TCP recovered to postdramatic and, most importantly, sustainable improvements in the secondhalf of 2002. By December 2002, SEF as a whole registered more than16,500 total clients and principal outstanding of R11 million bothincreases of 25% on a six-month period. Crucially, the average loan sizein TCP remained at a manageable R754, while write-offs dropped back

below 1% and monthly arrears and dropouts continued to decline.As TCP grew and its self-sufficiency ratio inched upwards, SEF

moved to standardize its management structures and simplify itsexpansion procedures. With the creation of zones encompassing up to five

branches SEF added a management layer to absorb all day-to-dayoversight of TCP. Additionally, managers of each zone assumed activeresponsibility for the performance of individual branches, budgeting andstaff performance contracts, as well as the deployment of newFieldworkers and the opening of new branches. Outsourcing TCPoperations to zones decreased the amount of time and effort field staff spent on communicating and travelling to the Head Office. Conversely,senior management in the Head Office were freed to focus on impact

projects and long-term goals relating to the effectiveness and expansion of TCP.

Accordingly, SEF dusted off its plans to transform itself into a purely pro-poor lender when it reached sustainability. Earlier projectionsof sustainability by 2003 were postponed by the destabilizing effects of rapid growth in TCP, leading to a re-evaluation of SEFs intention to

phase out MCP. Financially, the optimism generated by large increases inaverage loan size in TCP prematurely convinced SEF that the very poor alone could finance its sustainability without a huge jump in scale. As thisoptimism waned with creeping repayment problems SEF had to revaluethe financial contributions of MCP clients to its double bottom line.

Operationally, inherent drawbacks in the exclusive, targetedmethodology of TCP presented a persistent drag on SEFs plans to focussolely on poverty outreach. Foremost, the historic strict separation

between MCP and TCP precluded SEF from accessing the very poor invillages with MCP operations. This barrier prevented SEF from scalingup TCP without undertaking risky, expensive expansions with new staff in

new villages. Given the demands of the high-cost microcreditenvironment in South Africa phasing out MCP would further entrench


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administrative burdens by limiting potential clients to less than half of thehouseholds in TCP-targeted villages.

Therefore, in _____, SEF changed course and reintegrated itsfive existing MCP branches into its plans to stake its future on the successof TCP. SEFs answer to the inefficiency problems of growing as a purely

pro-poor lender was to relax the division between MCP and TCPoperations and experiment with mixed branches, villages and centres. The

policy change provided for greater efficiency as SEF expands TCP andrationalizes its administrative burden by opening existing MCP villages toTCP expansion, and vice versa. For successful TCP clients the prospect of graduating to MCP adds a ladder to bridge the divide from focusing on

poverty alleviation to wealth creation. Operationally, SEF is currently piloting several approaches to mixing MCP and TCP, testing how quicklythe demonstrated success of the very poor can break down better-off clients traditional aversion to sharing risk, oversight and educationalresponsibilities.

July 2004 Present (June 2005): Stage Six brought realization of SEFs projections of sustainability and ushered in the most recent phase of TCPexpansion, with its new commitment to mixing MCP and TCP operations.The result was SEFs financial self-sufficiency ratio exceeded 100% for the first time in September 2004. Most importantly, SEFs quality-focused adjustments continued to promote both steady growth andsuperior performance indicators. With this stability and its ability torecruit and train new staff to improve existing portfolios SEF projectedthat its current structure would guarantee sustainability for the foreseeablefuture.

As in Stage Two, the success of TCP presented SEF with thechoice of maintaining its impressive financial and performance indicatorsor replenishing its commitment to poverty outreach through expansion,while shouldering the added risk. With the final approval of its Board of Directors SEF chose the latter, endorsing the expansion-minded changesthat it had made in its management structure and to open up MCP andTCP villages.

Following up on these efficiency gains, SEF also incorporatedadditional private sector practices into its expansion by packaging a newfocus on recruitment with its poverty-targeting PWR Team. As opposed

to the previous, gradualist method of relying on individual DFs to buildand service their own portfolios, SEF created Starter Teams made upof 2 PWR staff, 2 Salespersons (new position) and the DF to deploy toeach new area. By combining targeting, recruitment and group trainingactivities, SEF hopes that this new expansion format will capture theexposure generated by PWR and translate it into faster client growth andquicker branch profitability.

Since reaching sustainability in September 2004, SEF hasreached 26,000 clients, opened three new TCP branches and begundeploying Starter Teams to new areas in these branches. By July 2008,SEF expects this format to provide a total of _____ new TCP branches.

Crucially, with Starter Team and DF targets SEF expects each area andDF to reach individual profitability in the 24 th (?????) month of operation,


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an improvement of 12 (??????) months over the previous, gradualistmethod of expansion. Ensuring that its expansion maintains a client toloan officer ratio of 275 to 1 (??????), SEF projects that its financial self-sufficiency ratio will stand at 107 (?????) percent in July 2008, when itwill have ________ clients.

(****Need more financial data and expansion events****)

In summary, the six stages of TCPs development reflect the operational and policy decisions made to adhere to SEFs original mission of eradicating povertyamong the very poor and achieving financial sustainability. In confronting missioncreep towards bloated loan sizes SEF reinforced its lending policy and realigned staff

priorities with an incentive scheme based on portfolio quality. To improve efficiencySEF embarked on a phase of integration between TCP and MCP that continues with

pilots to explore how to mix branches, villages and centres. These actions improvedimpact and efficiency as SEF demonstrated the primacy of its original assumption that

psychological barriers impeded the very poor from achieving financial independence.Yet, the real costs of fine-tuning TCP and adhering to a double bottom line

have been felt in villages that SEF has not reached and on the incomes of successfulTCP clients. First and foremost, SEF has devoted itself to designing a program thatensures and improves impact. However, the downside is that a program orientedtowards attaining financial sustainability faster by expanding to more villages and

boosting interest income would reach more of the very poor and allow successfulclients to take out bigger loans. Since making quality-focused adjustments to combatthe destabilizing effects of rapid growth from _____ to _____, SEF has sought to pushthis impact frontier outwards and upwards.

(H&M quote? Next paragraph?)SEFs current expansion of TCP using the newly-assembled Starter Teams

and its decision to provide a ladder for successful TCP clients to graduate to MCP arekey operational assaults on this impact frontier. Nevertheless, the costs of pursuing

both poverty outreach and financial sustainability in South Africa have buttressed thisfrontier since TCPs inception in _____.

IV. Resources Required/Cost to the Institution

(****Need yearly costs data****)

The unique high-cost microcredit environment in South Africa forced SEF tochoose the terms of TCPs development long before it disbursed its first loan.Conceptually, the choice was between theory and reality and SEF dove headlonginto the pursuit of a theoretical, methodological golden standard for microcredit inSouth Africa. In this sense, the choice wasnt between explicitly pressing growth in

poverty outreach or financial sustainability because SEF did not push to expand andintegrate until 2002 (?????). Driven by its institutional belief that the very poor do notneed special repayment flexibility or incentives to start and build their own

businesses, SEF mortgaged its short-term pursuit of a double bottom line in order tocreate, in TCP, a program based on impact (right word????).

An evaluation and comparison of SEF to 124 international MFIs, conducted in2001 by the MicroBanking Standards Project, underscores its emphasis on perfecting


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the methodology and operation of TCP, as well as the ever-present high-costmicrocredit environment in South Africa. As SEF refocused on clients needs inApril 2001, the report found that, SEF is above average in reaching the poorest of the

poor, about average in terms of access to market-based funding, but below average inits average loan size, both absolutely and as a percentage of GDP, operational self-

sufficiency and productivity. (SEF Pg ??) The analysis highlighted the effectivenessof PWR, but captured SEFs struggle to design a sustainable pro-poor lending

program within South Africas dual economy.Tellingly, at the time the report was published SEF had revised its loan size

policy and implemented new staff incentives designed to rationalize and, ultimately,slow the growth in average loan size policy in TCP. These quality-focusedadjustments dampened SEFs operational self-sufficiency rate, demonstrating itscommitment to designing a methodological golden standard before unleashing a dashfor scale.

Omnipresent in the development of TCP, the high-cost microcreditenvironment in South Africa distorted the productivity findings of the MicroBankingStandards Project. The low population density of South Africas rural regions,including much of the Limpopo Province, depresses SEFs client per loan officer rate.More specifically, productivity ratios using South Africas relatively high averageGDP hide absolute poverty levels similar to other African countries and cast doubt onthe efficiency of poverty outreach organizations. Both SEFs average staff salary as a

percentage of GDP and average loan size as a percentage of GDP suffer from thisinherent bias. (Add quote from SEF Pg. 30?????)

The costs of SEFs choice to adhere to a path that subordinated short-termgrowth and productivity to methodological rigor and portfolio quality were born byMCP. Fundamentally, these costs arose in two phases; first, with the subsidization of TCP operations by MCP, and, second, as SEF integrated TCP operations into thesystems it had set up for MCP. Throughout the development of TCP, the design, thelessons and income from MCP allowed SEF to pursue its methodological goldenstandard with another layer of financial and experiential insulation from donors.Although SEF was surely reliant on low-interest loans from donors to build andexpand TCP, it was able to use income from MCP and commercial loans to fund itsloan portfolio and separate its development and commercial costs. The effect was toreduce its dependence on and obligations to external subsidies and donors

prerogatives. SEF demonstrated this independence when it declined a R9 milliongrant from the South African Department of Social Development in 2000 (??????).

Subsidization gave SEF more freedom to experiment with its poverty-

targeting method and to maintain its commitment to group lending in an environmentthat would otherwise dictate an individual or streamlined group approach. In hisanalysis of SEF and two other MFIs pursuing poverty outreach, Martin Greeleyreferenced the corollary of targeting.

The case studies confirm that any form of targeting involves additionalcost. The trade-off issue is real. For an MFI that is working towardssustainability and also wants to target the very poor, it is inevitable that thecost recovery interest rate will be higher, in an accounting sense at least.To the very poor, the cost of money is higher. (15)

In SEFs case, subsidization allowed SEF to shield the very poor from theadditional costs of targeting by utilizing income earned from MCP clients. The


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inherent shortcomings in externally-driven measures of poverty coupled with SEFsemphasis on involving clients as stakeholders pushed SEF to experiment and tradethese costs for greater (???????) outreach. Clearly, the original housing methodsurvey used in TCP was far cheaper than the _______-step, community-led PWR

process. In fact, a strictly-financial argument could be made that the original method,

in which Fieldworkers conducted their own targeting at 70% effectiveness,outweighed the high cost of the former PWR Team, R500,000 per year. (Remember:the PWR Team has been folded into Starter Teams as of June 2005.)

As moneylenders and SEFs most serious competitor, Marang FinancialServices, have found, South Africas high-cost micro credit environment almostdemands an individual, staff-lean approach to lending. Thanks to its ability tosubsidize the targeting and development costs of TCP, SEF rejected this commercialorthodoxy in favour of poverty outreach and portfolio quality. Cost-wise, the choicesurely delayed its attainment of self-sufficiency until September 2004 and continuesto weigh on productivity ratios more tangibly than the effect of South Africasinherent GDP bias. SEFs group methodology limits its loan officer per client ratio of

_____ to 1, except or the highest performing staff. The result is that SEF must hire,train and employ more staff than a lender using an individual approach. Again, inSouth Africa, this is an especially risky and expensive proposition.

Under Apartheid, South Africas inferior black education system served to produce compliant labourers and low-level administrators. A majority of black adultswere educated under this system and post-Apartheid educational reforms have beenslow to produce results, meaning that SEF must invest considerable time andresources in training for Development Facilitators and managers. Once deployed,SEF has had to cope with many fully trained staff leaving for better-paying, less-demanding job opportunities. This has locked SEF into a balance sheet with salaryexpenses as a percentage of total assets that are four times the international MFIaverage.

Compounded with the low average loan sizes of a pro-poor lending program,the effect is that the average first loan in TCP is about one-third to one-fourth of aDFs monthly salary. Internationally, most MFIs disburse average first loans that areroughly 120% of an average loan officers monthly salary. Thus, to meet theinternational average DFs must service three to four times as many clients or increaseaverage loan size by fourfold both impossible tasks given SEFs environment anddouble bottom line.

Subsidization lowered these costs to the point that by 1999-2000 (??????) SEF believed that it could phase out MCP and reach sustainability by 2003. Of course,

these projections sprung from rapid growth that SEF chose to scale back; and, re-evaluating TCP in 2003, SEF recognized the benefits of its integration of TCPoperations into MCP systems and the need to provide a ladder for successful clients tograduate to MCP. This phase of integrating further lowered the costs of developingTCP and continues to improve SEFs efficiency. Beginning in 2000, SEFstandardized operations policies and procedures, administrative systems and staff incentives; from 2002-2004 SEF updated and simplified its management structuresand expansion procedures.

Despite the benefits of subsidization and integration, three built-in weaknessesin pro-poor lending anchor the impact frontier that has limited SEF to 26,000 clientsas of June 2005. These three basic costs are: higher risk, lower loan sizes and a

paradox that accompanies growth in client incomes. Fundamentally, a lender to thevery poor incurs greater risk in tapping a market largely ignored by even traditional


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moneylenders. However, the vulnerability of inexperienced clients limits the lendersability to shield itself from this increased risk by raising interest rates. Financialsustainability ultimately demands freedom from subsidies ideally, even internalones so an initial built-in weakness persists.

Both in absolute terms and as a percentage of salary costs the average loan

size in TCP remains low. Apart from structural limitations SEF has engineered its fallwith a conservative loan size policy and staff incentives rewarding portfolio quality.These quality-focused adjustments avoid over-burdening new TCP clients, ensuringthat they cultivate business skills before assuming heavier liabilities. Of course, thesemeasures all unavoidably restrain SEFs loan interest income, while, to a lesser extent, hindering TCP staffs ability to compensate by servicing more clients. This isa second built-in weakness.

Just as average loan sizes begin small they grow more slowly than in moretraditional microfinance programs. Development Facilitators in TCP take anadditional 12 months to reach a full portfolio compared to their counterparts in MCP.As noted earlier, they typically cannot service as many clients because of the addedoversight and support required in working with the very poor. More to the point,successful TCP clients can reduce the transaction costs of borrowing by taking their

business to commercial lenders. If SEF had pursued its intentions of phasing outMCP it would have run head-on into this growth paradox. This is a third built-inweakness of a pro-poor lending program. (Add H&M quote about externalities????)

SEF has countered these three basic costs of operating TCP throughintegration with MCP. In its final act, this integration will eventually combine TCPand MCP in branches, villages and, perhaps, centres.

V. Challenges and Pitfalls/Lessons Learned ( SPECIFIC Challenges andSolutions)

- Challenges:- Lack of business expertise- Repayment (due to clients start-up risks)- Increased impact of short-term shocks/crises- Banker vs. social worker staffing

- Solutions:- Group and centre network development (as it varies from MCP clientculture)- Short loan cycles, small loan sizes

- Internal group loans from savings accounts- DF recruitment and training

case study sef tcp

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