SECP

Final Report

September 28, 1995

. . . C g~?~bie.gjI A ~ r l ~ l t u m l cooperative Development lnternatlonal

Small Enterprise Credit Program Cooperative Agreement No. 263-0228-A-00-2026-00

Effective Dates: March 1, 1992 - September 30,1995

PIOIT NO. : 263-0228-3-91088

Project No.: 263-0228 ...

Total Amount Obligated: $i ,490,908 and LE 612,786

Modification No. 1 : March 5, 1992

Modification No. 2 : February 14, 1995

Pictured on the cover is Shadia Mahrnoud Abdel Kameed, an SECP borrowerftorn the Project's Helrvan Branch. Her prqfile and others appear in Appendix B of this report.

TABLE OF CONTENTS

Preface

..- Executive Summary

Project Management Support Module

Credit Management and Policy Module

Training Module

Management Information Systems (MIS) Module

Financial Analysis Module

Appendices A - Comments on Project Achievements B - Borrower Profiles C - Analyses of July 1995 Monthly Report

List of Acronyms

ACDI - Agricultural Cooperative Development International ALTS - Automated Loan Tracking System CA - Cooperative Agreement MIS - Management Information Systems NBD - National Bank for Development RSSE - Rural Small Scale Enterprises Project SECP - Small Enterprise Credit Program SELFA - Small Enterprise Loan Fund Agreement SME - Small and Micro Enterprise USAID - United States Agency for International Development

Agricultural Coopefltlve Development international

SECP F i l Report 1

PREFACE

The Small Enterprise Credit Program's (SECP) Cooperative Agreement (CA) specifies that: "The major objective of this Agreement is to develop the National Bank for Development's (NBD) capability to extend, supervise, and recover short tenn credit to small entrepreneurs, with a primary concentration on the area of metropolitan Cairo." "It is expected that up to 20,000 small entrepreneurs will be served by this project. " The document further states that: "The general purpose and scope of this Agreement are to

..- develop staff and systems to ensure the timely and efficient delivery of credit and other required support to the target clientele."

From the purpose and scope of the CA, ACDI developed the following five modules in its fmt Master Plan of Action:

- Project Management - Crtdit - Training - Mapgement Information Systems (MIS) - Financial Analysis

Three subsequent Master Plans of Action were submitted to USAID, which utilized the modules, omitting them when ACCI had completed activities of the respective modules.

This report describes ACDI's activities by module over the 43-month tern of the CA from March 1, 1992 through September 30, 1995 and provides recommendations for NBD and USAID at the end of each module. A number of the recommendations have been made in past quarterly reports to USAID. ACDI supplied the following technical assistance personnel for the respective terms ude r the CA: Team Leader (43 months), Credit Advisor (31 months), MIS Specialist (18 months), Tmining Specialist (12 months), Financial Analyst (15 months).

Appendices to this report contain comments supporting the project's achievements, analyses, and profiles of SECP borrowers for the interested reader. Those seeking more detailed technical information are referred to the Finance and Investment Office at USAID in Cairo, Egypt. ACDI's monthly a d quarterly reports submitted to that office contain detailed information for the respective reporting periods.

Data utilized for this report and ACDIJs monthly and quarter& reports were supplied by the NBD. As ACDI received &a from NBD, checks were pedonned for intern1 consistency because the dato were taken from hand-compiled recordr. ACDI has no reason to believe that & f a were deliberate& misrepresented but makes no representation or warram regarding the data. ACDI was responsible for the interpretation of the NBD data for use in project monitoring and management.

SECP F i l Report 7 - t

EXECUTIVE SUMMARY

ACDi supported the implementation efforts of the NBD under the SECP utilizing the methodology of the successful Rural Small Scale Enterprise Pilot Program (RSSE.) Support was provided under five modules: Project Management, Credit Management and Policy, Training, Management Information Systems (MIS), and Financial Analysis. ACDI's technical assistance -

support contributed to the outstanding success of the Project. . -

SECP's achievements in the credit module have far exceeded performance expectations. As of August 31, 1995, SECP cumulative loans disbursed numbered 57,371 representing a total of LE 136,823,339. Lending began on July 1, 1993 and, at the end of 25 months of lending (on July 31, 1995). 26,945 borrowers had been served, over a third more than the 20,000 mentioned in the Cooperative Agreement. Credit quality was excellent, with a 97% collection rate. Loans to women entrepreneurs represented 12.7% of cumulative loans by number and 10.7% by amount. The sound lending program allowed SECP to break even operationally with disbursal of only $9.15 million of the $1 1.15 million that had been budgeted for loan funds from USAID.

AID Administrator J. Brian Atwood and Deputy Administrator Carol Lmcaster visited the Project at different times in 1994 and were both impressed. Atwood wrote to the NBD Project Director after his visit: "I was very impressed with the results I saw when I visited the Greater - Giro Program of SECP. .. . it was grat@ing to see first-hand the tmraordinary impact of a m~ T

program that is little more than one year into credit activities. "

Results achieved in the credit area confm that the model used is valid and that banks can profitably reach informal sector borrowen. Also, because the same model is being used in rural Egypt under the continuation of the former RSSE Project, the model is replicable throughout Egypt. Although the validity of the model was confixmed, the TA Team was unable to convince NBD to utilize its own funds for lending. NBD was contractually obliged to contribute LE 10 million of its funds to the SECP loan fund after December 31, 1994, yet as this report was drafted, the contribution had not been made.

A project Training Specialist completed a training program with SECP employees before lending began. During an integrated training program, delivered from March through May of 1993,276 persons were trained.

Automationkof MIS proved to be a formidable task. SECP staff still use a manual MIS system. Although this manual system has sufficed up to this time, the present volume of loan activity requires automated records. NBD was unable to attract qualified and experienced personnel to head the SECP computer department. Because of this, the SME Department relied heavily on outside consultants.

ACDI's Financial Analyst produced volumes of management information tools in the form of

SECP F i l Report 3 9 - ,- -

49 analyses. By the end of the Financial Analyst's tenure with SECP, the Project Director was using ACDI's analyses to manage the Project.

SECP reaclied operational breakeven after only 18 months of lending operations. Long-run operational sustainability of SECP rests on coverage of cash operating costs, loan loss reserves, cost of funds and depreciation. During May through July 1995, that ratio has hovered around 882, which is outstanding for a program of this age. ACDI concludes that, with modest attention to operational details, the SECP program would fully sustain itself even if it were paying market rates for loan capital.

..- NBD changed the senior management of the SME Department during the second week of September 1995. Because the TA Team was closing out the Cooperative Agreement, the only support the team was able to provide to the new management was a briefing on the analyses of project data and their use in directing project activities. The new leadership agreed with ACDI that SECP had been vey successful and had produced outstanding results.

PROJECT MANAGEMENT SUPPORT MODULE

Goal

Provide advice to NBD management for the timely and successful implementation of SECP.

... Proiect Activities

ACDI support under this module was primarily provided by the Team Leader and Credit Specialist during the first two-and-a-half years of the Cooperative Agreement. From September 1994 through September 1995, the Financial Analyst played an increasingly innportant role in supporting project management. The TA Team's support of management was instrumental, in ACDI's opinion, in achieving recognition for the NBD's efforts with SECP.

Excerpted below are letters from USAID about SECP's activities. (The letters appear in their entirety in Appendix A.) In a June 1994 letter to NED (2hahlm El h b ~ , Deputy AID Administrator Carol Lancaster wrote,

"The microenterprise lending program in Egvpt is a good model for the donor community in supporting microenterprise lending programs in other countries. The case srudies provide a good description of how microenterprise lending programs assist small entrepreneurs. I intend to share the case studies with my colleagues in the U.S. Agency for International Development. *

The case studies Ms. Lancaster mentions were in fact borrower profiles that had been developed by the TA Team. Examples of the profiles appear in Appendix B. In October of 1994, Ms. Lancaster's supervisor, AID Administrator J. Brian Atwood, wrote to the NBD Project Director Ismail Siam regarding his visit to SECP.

"I was very impressed with the results I saw when I visited the Greater Cairo Program of SECP. . . . it was grmfiing to see first-hand the1 extraordinary impact of a progray that is little more than one year into credit activities. "

In concert with the letter from the Administrator was a September 1994 letter from Priscilla Del Bosque, the AID Cairo Associate Director for Trade and Investment, to Chairman El Oraby expressing, -

" . . . appreciation for the outstanding p e g o m c e and support provided by the National Bank for Development (NBD) &ring the AID Administrator's visit and the

SECP F i l Repon 5 , * r

International Conference for Population and Development (ICPD..) . . . the Administrator - was impressed by MD's eforts and commented on the achievement of the bank in

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increasing productivity and improving the standard of living among the small borrowers --

assisted by the Small Enterprise Credit (SEC) Roject. "

Much of the behind-the-scenes support for the Administrator's visit and ICPD was a result of the ACDI Team's interaction with NBD personnel.

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Although the Cooperative Agreement was effective on March 1, 1992, it was not until -

... August 16, 1992 that NBD and USAID signed the Small Enterprise Loan Fund Agreement (SELFA). The Team Leader worked closely with the Project Director to help NBD meet documentary requirements prior to the signing of the SELFA. After the signing, the entire Team assisted NBD in meeting the conditions precedent specified in the SELFA.

- Overall direction and guidance to NBD management included training key SME Department personnel in SELFA requirements, decision making, and institution building.

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Soon after the signing of the S W A , ACDI recommended creation of a decisionmaking forum involving USAID, NED, and ACDI. This recommendation resulted in the creation -

of the Task Force Committee which, in the early stages of SECP, met weekly to discuss issues and formulate plans, with ACDI recording and distributing minutes.

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In addition to serving on the tripartite committee, the expatriate advisors served on the Executive Committee, an internal advisory committee created to assist the Project Director. Both of these fora received substantial support from the ACDI Technical Assistance Team. When there were differences of opinion between NBD and USAID, the Team assisted in clarifying issues.

During the second quarter of 1994, USAID and the NBD discussed expansion of the program into Upper Egypt. As a result of the discussions, NBD needed to present a proposal to USAID on the expansion. NlsD requested TA Team support in the preparation of detailed descriptions and projections of loans and budgets for 13 proposed branches in Upper Egypt. The Team used computer models it had developed for SECIP to prepare a set of scenarios. The Project Director and the NBD Chairman during this quarter used descriptive materials the Team had developed for SECP at an SME conference in Mexico City.

The Team repeatedly encouraged the Project Director to delegate more responsibility to deputies, allowing the Director more time for management and planning. Lower echelons of management were underdeveloped because of limited access to the Director and his tendency to become involved in operational details. ACDI had identified this situation in management and indicated, during a meeting with several sections of USAID in the summer of 1994, that despite the outstanding operating results it achieved, the SME Department lacked depth.

ACDI's TA Team ceased active support of NBD's SECP activity at the close of business - on August 31, 1995 in order to complete an orderly close-out of the Cooperative Agreement. On September 10, the individual who had served as Project Director since RSSE was transferred to a branch outside the domain of the SME Department. The new person heading the Department was formerly the General Manager for Cairo branches. It is uncertain if the transfer implies a change in status of the Department within the Bank, because the former head was a deputy general manager. Additionally, the only deputy to the former Project Director was transferred outside of the SME Department on September 14.

... Only cursory attention to the new management was passible because ACDI was in a close-out phase. Since the Team believed that the loss to the Department within one week of the experience of the top t w ~ individuals would create difficulties for the Program, they sought to mitigate the constraint. The best tool the Team could provide the new management for operating the Program was a set of the 49 analyses ACDI had performed for SECP as June 30, 1995. The Team Leader presented a complete copy of the analyseq to the new manager in a meeting on September 11 and explained how they could be useful in managing the Department. At the end of the meeting, the manager directed that all of the analyses be included as reports in the soon-to-be-operational automated SECP MIS system. The Team Leader and the new manager agreed that SECP had been very

' successful and produced outstanding results.

Recommendations

To the NBD:

- Delegation of authority in the Headquarters Office is needed for effective bctioning of the SME Department.

- Clear, concise, written job descriptions should be made available to all employees.

- Catefully examine the staffing of Headquarters which represents approximately 20% of SECP operating exlx;llses and generates no income.

- Maintain a full complime~~ of credit extension officers at all times, because they are the pn;marY income-producing emloyecs for the Project.

To USAID:

- Despite institutional concerns regarding depth of SME Department management, the Program and methodology have been remarkably su-ful. Incentives to replicate this Program and methodology should be offered to other Egyptian banks.

- The savings component of the Program could have functioned more successfully had NBD been required to utilize some of the savings in lending. In future, utilization of savings in lending cmld be counted as part of the counterpart contributions, thus creating an institutional incentive for savings mobilization.

Goal -

CREDIT MANAGEMENT AND POLICY MODULE

Assist the NBD in developing it. capability to extend, supervise, and recover short-tern credit to small entrepreneurs in the Greater Cairo area.

SECP's achievements in the credit module have been consistently outstanding and have far exceeded performance expectations. As of the end of August 1995, SECP cumulative loans numbered 57,371 for a total of LE 136,823,339. Although complete daFa for August was unavailable at the writing of this report, data for the end of July will be used for the rest of this module and is included in Appendix C. The appendix is an example of ACDI'o monthly reports to USAID.

Lending began on July 1, 1993, and at the end of 25 months of lending (on July 31, 1995). 26,945 borrowers had been served, over a third more than the 20,000 mentioned in the Cooperative Agreement. There were 16,046 outstmding borrowers with loans valued at LE 25,129,789. (NBD values these loans at LY 31,263,060, the amount of principal and fees expected to be collected over the remaining life of those loans.) Although disbursal of more than 50,000 loans appears impressive, the key to succcq in a credit program is measured by loan repayment. Credit quality was excellent, with d 97 % collection rate (value of overdue [past final maturity daie] principal and fees divided by LE 31.263 million.) Loans to women entrepreneurs represented 12.7% of cumulative loans by number and 10.7% by mount, providing a cumulative average of LE 2,007 versus LE 2,426 for loans to men as of July 31, 1995. (See Appendix C.) The sound lending program allowed SECP to break even operationally with disbursal of only $9.15 million of & $1 1.15 million that had been budgeted for loan funds from USAID.

The impressive achievements under the credit mdule were not the result of chance. First, the credit methodology used was developed under the successful pilot program RSSE. The methodology was distilled into a four page document which became Exhibit

. L to the SELFA Agreement between USAID and NBD. Second, two expatriate credit advisors were provided by ACDI under the contract: a Team LeaderISenior Credit Advisor, Charles Vokral, sewed from March 1, 1992 through November 15, 1994, and a Small Enterprise Credit Advisor, Ronald Bielen, from May 1992 through the end of Mr. Vokral's term and then assumed the position of Team LeaderlSenior Credit Advisor until completion of the Cooperative Agreement on September 30, 1995.

The advisors worked closely with the Project Director in designing and delivering training to NBD staff in loan extension and recovery, portfolio management, and

reporting. A comprehensive credit policy guide was prepared for the Department, though the NBD did not take ACDI's recommendation to review and implement the guide. The advisors often cautioned the Project Director that the lack of written credit procedures available to all SECP staff was a weakness.

Projections of loan fund requirements were developed and refined by the advisors with the input of the Project Direct~r. A computer model was developed to generate the projections. NBD, however, did not assign staff to work in this area and so the advisors were unable to tramfzr the technology to NBD personnel.

-. The advisors gave special attention to the composition of the credit portfolio, which is spread among the four sectors served by SECP: investment, production, service, and commercial. Balance among the sectors was emphasized to spread risk. NED Steering Committee guidance specified that the portfolio portion of commercial loans should not e x w d 17% by volume. Appendix C shows that 66% of the portfolio was concentrated in the investment and production sectors as of July 31,1995. Project management agreed with the TA Team that the greatest developmental impact could achieved in these two sectors. Although the portfolio was classided in four sectors, nearly 200 different types of activities were financed by SECP, a situation similar to that of the pilot RSSE Project. Appendix B contains three proftles of typical SECP borrowen written from interviews conducted by the TA Team.

The results achieved in the credit area confim that the model used is valid and that banks can profitably reach informal sector borrowers in metropolitan Cairo. Also, because the same model is being used in rural Egypt under the continuation of the former RSSE Project, the model is replicable throughout Egypt. Although the validity of the model was confirmed, the TA Team was unable to convince NBD to utilize its own funds for lending. ACDI's fioancial analyses confirmed that NBD could profitably use its own funds in the program. NBD was contractually obliged to contribute LE 10 million of its funds to the SECP loan fund after December 31, 1994. As this report was drafted, the contribution had not been made, and availability of funds was becoming a constraint to further growth of the program.

SECP sewed small entrepreneurs well, however there is room to expand the loan products available. Many clients requested longer terms than the average six months available to most clients. Lengthening the term in cases with longer cash flow cycles would increase risk slightly, but this could be controlled by loan servicing, which is a Strength of the program.

To the NBD:

Seriously examine the results achieved by SECP. The TA Team believes the results merit commitment of NBD's own funds to SME lending.

Determine whether or not the bank wishes to commit to SME lending. All 20 branches under the SME Department have been established with donor funds. Further funds will not be available indef~tely and unless the bank commits its own resources to the program, it will remain static and fall far short of its true potential to spread throughout the 64 branches of NBD.

Recognize that the model utilized in SEC P is highly successful and could easily be replicated by other-banks in Egypt.

i'he status of ownership of the loan fund has not been settled. The development interests of the more than 16,000 outstanding borrowers should be considered when settling this issue.

SECP Final Repon

TRAINING MODULE

Goal

Assist NBD in the design, logistics, delivery and evaluation of training for branch managers, credit extension oficers, and support staff engaged in SECP.

Proiect Activities

ACDI provided Abdel Zaher El Hakim, an Egyptian national, as a Training Specialist for a 12-month contract beginning in December 1992. The Specialist completed a training needs assessment, and then worked with the Project Director to develop training curricula. These curricula were utilized to train 276 persons from March through May of 1993, in an integrated program including:

- One week of ihtensive basic training

- Two weeks of field training in operating branches of the SME Department

- One month of field traininghfonnation collection .in each trainee's prospective SECP branch

Subject matter specialists conducted training sessions in their areas of expertise. During the training process, the ACDI team and the Project Director produced a training manual and case studies, and conducted continuous evaluations of the training program. As part of the evaluation process, the ACDI Training Specialist attended weekly branch manager meetings hosted by the Project Director. Evaluation led to follow-up sessions and refresher courses. The ACDI team also assisted with evaluations of NBD SECP staff, resulting in placements in specialized training courses such as English language, translation, women in development, and Management Idonnation Systems (MIS).

The Training Specialist primarily administered the training program, working one-on-one with the NBD personnel supervisor who was responsible for training. Subsequent to the December 1993 completion of the Training Specialist's contract, a follow-up training seminar for 166 SECP staff (who had undergone basic training in 1993) was conducted in February 1994 with assistance from the ACDI team. The NBD personnel supervisor organized the seminar using skills transferred by ACDI's Training Specialist.

SECP had 365 employees as of July 31, 1995. Thirty-two of these were service workers, including drivers. The remaining 333 employees received either direct, group

- 1 I SECP Final ileport 12

based training under the project, or on-the-job training from persons who had undergone group training in SECP. Included in the 333 were 140 loan extension officers, and 26 branch and assistant branch managers who are responsible for the credit extension effort of SECP.

One indication of SECP's successful training record was requests by organizations, especially those outside Egypt, for placing trainees with SECP to gain skills in SME finance. This is noteworthy because there has been much discussion in the NBD about creating a regional SME training center. Three persons, two of whom were from outside Egypt, were placed with project employees for orientation during the course of the Project.

Despite the interest expressed in training and a training center, NBD was unable to maintain a cadre of persons responsible for trailing. The perso~e l supervisor left for another position subsequent :o the departure of the ACDI Training Specialist. Other NBD staff who had assisted in the initial training p q p m s continued to function in other capacities after the programs. .4ccordingly, the Project Director was directly accountable for training, oqe task among the many competing for his time. As the Project neared completion on September 30, 1995, the absence of a training supervisor was seen as a limitation of the SME Department.

SECP Final Report

Recommendations

To the NBD:

- Develop training capability of SME Department by establishing a professional training unit in HQ, appointing a person to administer the unit, and by hiring experienced training staff.

- After centralizing management of training in the unit, develop a work plan that takes future SME Department needs into consideration.

- Design and deliver. computer sohare skills training at all levels of HQ operations to improve staff efficiency.

- Design of microcredit programs similar in scale to SECP should include as a condition precedent the appointment of a Training Director.

- There is widespread interest in micro-enterprise credit in Egypt. USAID should f- the Arabic translations of some of the many excellent reference documents on small- and micro-enterprise lending and provide them as resources to Egyptian practitioners.

- NBD branches should be considered as resources where on-the-job training could be conducted for other SME practitioners in Egypt.

SECP Final Rcpon - 1 J ,

MANAGEhaENT INF'ORMATION SYSTEM (MIS) MODULE

Goal - Provide guidance to NBD in the development of automated MIS capability within SECP to include trained staff and integrated accounting and loan tracking software.

Proiect Activities

Plans for the automated MIS of the Project were often frustrated for a variety of reasons. Although this has affected the project, the excellent handwritten records of NBD's SME Department sewed to mitigate this situation. This was the Department's MIS system. All of the analyses and reports developed by the TA Team were derived from data provided by NBD from the manual MIS system.

ACDI fielded ,Mohamed Mosleh, an Egyptian national, as MIS Specialist for 18 months from September 1992 through March 1994. The Specialist quickly became involved, at the request of USAID, in a joint effort with the NBD Computer Department to assess the suitability of mini-computers versus PCs for the Project MIS. As a result, USAID was able to reaffirm PCs as the best choice for SECP.

One of the base assumptions upon which MIS plans had been developed for the Project was that the Automated Loan Tracking System (ALTS) developed under the pilot Rural Small Scale Enterprises Project (RSSE) could be readily inserted into the SECP operation. Unfortunately, during the period between the end of RSSE and the beginning of the NBD's agreement with USAID on SECP, r e s o m were not available to field test and refine ALTS. Accordingly, further effort was r w m u y to bring it to operational capability and Arabize it. The MIS Specialist participated in a field test of ALTS with the designer.

Recruitment of qualified and experienced personnel to head the SECP computer department proved to be a challenge. NBD's salary scales simply were insufficient to attract the necessary caliber of leadership. Recognizing the need to emphasize training to develop a cadre of qualified NBD computer staff, in August 1993 ACDI submitted a proposal to USAID to recruit an MIS Specialist with extensive experience in accounting and training senior personnel. This proposal was not approved by USAID. Although NBD has staffed the computer department, skilled senior level personnel experienced with PCs are still unavailable. The Department has relied heavily on outside consultants.

As the computer department was established for SECP, and the MIS personnel recruited by NBD, ACDI's MIS Specialist r e f a job descriptions, developed a floor plan for the

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SECP Final Rcpon 15 , a a -

unit, prepared preliminary and indepth MIS training plans, and proposed course structure and content. He also conducted introductory computer training for five NBD staff members and training in financial and accounting software for one person.

As work continued in MIS, the Specialist assisted NBD in writing specifications for hardware and software, and in updating the specifications as new information became available. After reviewing the Automated Loan Tracking System (ALTS), the Specialist presented NBD with a list of recommended enhancements in April 1993. After the development of specifications, the TA Team supported NBD's MIS procurement efforts. The Team advised NBD on prequalification criteria that would maximb value in hardware and software. Later, the Team assisted in screening companies based upon the prequalification criteria. After the hardware bids were received by h i D , the MIS Specialist developed a comparative. analysis of the bidsfor use by the NBD Procurement Committee in decision making.

As a member of the Computer Hardware Committee and the Accounting Software Committee, the MIS Specialist supported committee members by explaining txhnical issues to them. The support was especially helpful in the automated accounting area, in which committee members had no experience. The Accounting Software Committee was established primarily on the recommendation of the MIS Specialist, who sought to involve NBD personnel with accounting experience in the process of identifying minimum accounting requirements. With the Specialist's support and encouragement, Committee members were able to define the features NBD required for SECP accounting software, building upon a description of the features required of an automated. accounting system that the Specialist had previously submitted to the NBD. With these specifications in hand, the Committee proceeded to evaluate two "off the shelf" options for the SECP accounting software package. Demonstration copies of each package were put through trials with actual SECP data. The MIS Specialist took a lead role in iustmcting Committee members in the operation of the packages. In February 1994, after extensive testing by the Committee, the package with the most appropriate features was recommended to NBD management for use in the SECP.

Based. upon the package recommended by the accounting committee, the MIS Specialist developed the specifications for the module to link ALTS with the accounting software. Assistance was also given in preliminary installation of the ALTS component of MIS at the branches.

ALTS was Arabized and installed by NBD personnel, and operated by newly trained staff in all SECP branches of NBD by the end of March 1994, with staff entering loan data to test the system.

Procurement of the accounting system and its integration with ALTS had not occurred as of the end of the Specialist's contract in March 1994 because bids were still being

-. , SECP F i l Report 16

evaluated by NBD management.

Although ACDI was able to meet its contractual MIS obligations as per the Cooperative Agreement, automated MIS implementation remains behind schedule. During the third quarter of 1994, the procurement committee selected the accounting software package which had been recommended by the MIS Specialist. During the second quarter of 1995, NBD decided to have the developer of the accounting software produce a loan tracking system in the same software language, eliminating interface difficulties faced with ALTS.

-. Although much testing has taken place on this latest system, as of the writing of this report, SECP still lacks an operational, automated MIS.

The NBD, in ACDI's view, is facing a variety of management issues related to the introduction of computer technology and does not have the expertise among its staff to offer sound guidance grounded in experience.

To the NBD:

- Take decisive action to complete testing of the MIS system and make it operational.

- Recruit experienced sbffwho can complete in-house system enhancements for the SECP Headquarters MIS Department.

- Release of MIS funds should be made contingent on staffmg of senior positions in the MIS Department of SECP by persons with PC experience.

- Enter into discussions with NPT) on the potential for usage of the automated MIS in other Egyptian banks who may begin SME lending.

SECP Final Report

FINANCIAL ANALYSIS MODULE

Goal - Assist the NBD in developing analytical tools to support SCEP management in decision making.

Proiect Activities

ACDI's recruitment of a Financial Analyst was deferred at the request of the NBD Project Director until the end of the first year of lending. Prior to the analyst's recruitment, the Team Leader and Credit Specialist provided some initial financial

. analyses of SECP. The recruitment of the Financial Analyst Mohamed Ragui relieved other team members of the analysis workload, which they had been shouldering in this module. That work included a monthly analysis of income and expenses and maintaining a model used to project credit f h d asage.

. Delay in securing a serviceable computer from NBD proved a constraint during the Analyst's first, quarter of work, as did procurement of software. Eventually, ACDI purchased its own spreadsheet software in order to have a reliable program.

At the end of the quarter in which the Analyst joined the TA team, 20 new analyses with 101 graphs were supplied to NBD and USAID as an appendix to the quarterly report. These reports subsequently became the standard for analysis in SECP. Detailed portfolio reviews of each of the four sectors served by SECP (production, service, investment, and commercial) were developed. The reviews tracked number, amount, and average loan site. Gender-based portfolio composition by branch was developed to include cumulative aud outstanding loans by number, amount, and average size. Portfolio distribution by branch, based on number, amount, and average loan size, was also prepared. Profitability and productivity were stressed with a number of new analyses. A separate analysis to clearly identify "operational break-even", as defined in the Small Enterprise Loan Fund Agreement (SELFA) between NBD and USAID, was produced continuously throughout the tenure of the Analyst.

This particular analysis allowed the objective verification of break-even, a term which was loosely used and misinterpreted by many during the term of the project. Although the initial break-even analysis measured overall profitability, other analyses presented project revenues and expenses by branch and a productivity analysis per employee by branch.

Comprehension and use of the analyses under this module required a fundamental understanding of the basis used in developing the analyses. Once this basis became clear to the users, they recognized the analyses as a precision tool for understanding SECP. The Project Director, who was initially skeptical about the analyses, readily embraced them when he recognized their value in managing the Project. By the last month of the Financial Analyst's service with SECP, the Project Director was using ACDI's analyses to manage the project. The Analyst was frequently called upon by the Director to discuss

. various analyses, explain the implications of the information for management of the Project, and develop new analyses for specific purposes. An Analyses Manual was

-- developed for management from a select group of the analyses.

One early and dramatic example of the usefulness of the analyses revealed to the Director was identifkation of an average caseload of 46 loans per credit officer in one branch versus 126 in the top performing branch. A further example was identification of five branches not covering or only nominally covering salary expenses versus four branches at the same time generating over LE 900 per employee beyond salary costs. NBD used information of this nature to determine incentives and identify branches requiring remedial action.

Because the data prepared by the NBD was compiled by hand, the Analyst often identified errors and inconsistencies in the calculations. Although this proved frustrating for those supplying the data, NBD benefited from the process by revising and improving the accuracy of their compilations. If the NBD had had an operational, automated MIS system, much of the difficulty with records could have been avoided. Initially, manual records were mfiicient, but by the end of August 1995, when a cumulative total of more than 57,000 loans had been made for a value of LE 136.8 million, the likelihood of error in recordkeeping had become a significant operational constraint.

The importance of the analyses provided by ACDI was also recognized in January 1995 when the Project Director included al l of the analyses in the SECP section of a comprehensive annual report of NBD's SME Department. Evidence of the value of the analyses was also seen outside the Project: NBD used the analyses widely at various conferences and meetings in which it participated. Visitors to the Project frequently requested detailed information on the analyses and expressed interest in transferring the

' technology to their organizations. "We need this" was the reaction of Abbey Mahlalela, the manager of Micro-Sector Finance at Standard Bank of South Africa, when his visiting team examined ACDI's set of SECP analyses in February 1995.

It is easy to understand Mr. Mahlalela's enthusiasm for ACDI's Break-Even Analysis "With Reserves" (see Appendix C) which measures progress toward this gauge of SECP financial performance, a key point in SELFA. SECP moved steadily toward operational break even as evidenced by this analysis. The analysis clearly identifies operating income and operating expenses by month, along with a break-even ratio. A loan loss reserve of 5% of the income is deducted prior to calculating the ratio. During October 1994, after

16 months of lending, SECP was able to cover monthly operating expenses. Since that time, the Project has consistently covered monthly operating expenses. Three consecutive months of break even, ending on December 31, 1994, after 18 months of lending, met the contractual definition of break even between NBD and USAID.

ACDI developed new measures of break even, including an imputed cost of funds in the calculation (in lieu of the zero cost of donor funds.) The imputed cost per month was based upon the internal transfer rate used by NBD applied to the month-end outstanding principal balance. (See "SECP Cost of Funds and Fees Analysis" and "Break-Even Analysis With Cost of Funds" in Appendix C.) SECP was fully able to cover cash operating costs plus imputed cost of funds in January 1995. Since then, the ratio has hovexed near that mark. A number of areas were identified to the Project Director which would result in improving the break even with cost of funds ratio.

Long-run operational sustainability rests on SECP covering cash opesting costs, loan loss reserves, cost of funds and depreciation. The Financial M y s t developed tMs concept into a break-even ratio for management. Scenario Four in the Appendix C "Break Even Scenarios" illustrates project progress toward this more complete measure of break even, with SECP consistently reaching 88% coverage during May through July 1995. outstanding program achievement could be considerably improved through effort in detailed areas that were brought to the attention of the Project Director.

ACDI concludes that, with modest management attention to operational details, SECP would fully sustain itself even if it were paying market rates for loan capital.

1

- m a g

Recommendations

To the NBD:

Establish a fmc ia l analysis section within the SME Department and staff it with at least two trained persons and a secretary.

Determine which of the analyses prepared by ACDI have not been programmed into the pending automated MIS system and then cake action to add them.

Utilize spreadsheets in the numerous PCs available in the Department to process routine reports requiring calculations.

Operational break even as defined in SELFA is only one measure along a continuum of measures. Future SME project designs should consider additional break-even measures to gauge success, especially covering cash operating costs, imputed cost of funds, depreciation, and loan loss reserves.

Appendix A Comments on Project Achievements

CCT - 6 1994 Mr. Ismail Siam, Project Director National Bank for Development 48-50 Abdel-Xhalek Sarwat St. P.O. Box 647

. Cairo, Egypt

Dear Mr. Siam:

Thank you for your letter of September 7, 1994, regarding my visit to the Small Enterprise Credit Program (SECP). I was very impressed with the results I saw when we visited the Greatar Cairo Program of SECP. We have a strong commitment to small and microenterprise development as part of our strategy to create sustainable economic growth, and it was gratifying to see first- hand the extraordinary impact of a program that is little more than one year into credit activities. Your positive experience with regard to aggressive outreach and attention to sustainability is one that is shared by other similar programs around the world.

Your concerns about the need to study our experience with similar programs in other countries are well founded, and I encourage you to work with our Cairo Mission to obtain evaluations of those programs. We have a great deal of experience, particularly in ~ s i a and Latin America, and the Mission would be pleased to help you.

. It was a pleasure for me to have an opportunity to make your rcquaintance, and I look forward to meeting chairman El Orabi at some future date.

Sincerely,

Mohamed Zaki El-Oraby Chairman National Bank for Development (IIBD) 5 El Borsa, El Gededa St. P.O.'Box 647, Cairo

. .

" Dear Elr. El-Oraby:

I wculd like to acknovledge with appreciation receipt of your letter of.May 11 and accompanying seven microenterprise case studies. The microenterprise lending program in Egypt is a good model for the donor community in supporting microenterprise lending programs in other countries. The case studies provide a good description of how microenterprise lending programs assist small entrepreneurs. I intend to share the case studies w i t h my colleagues in the U.S. Agency for International Development (USAID).

It was ,a pleasure to meet with you and your staff. I found my visit with the National Bank for Development to be very enjoyable and productive. I wish you continued success with your programs.

Thank you again for your thoughtfulness in sending the microenterprise case studies.

Sincerely, P

@&4) L-4- Carol Lancaster Deputy Administrator

September 29, 1994

Mr. Zaki ~ l - ~ r a b ~ Chairman Kational Bank for Development

SUBJECT: Special Recognition

Dear Mr. El-Oraby:

The purpose of this letter is to express our appreciation for the outstanding performance and support provided by the National Bank for Development (NED) during the AID Administratorf s visit and the . International Conference for Population and Development (ICPD) . Special recocjnition should be extended to Mr. Ismail Siam who demonstrated a high level of professionalism and a sincere spirit of cooperation that is commendable.

A s a result of his efforts, the Administrator was impressed by NED'S efforts and commended on the achievement of the bank in increasing the productivity and improving the standard of living among the small borrowers assisted by the Small Enterprise Credit (SEC) project . I was informed by the USAID project management team that the NBD/SEC project has reached operational break-even ahead of schedule, in only fourteen months of end-use lending. I would like t o take this opportunity to congratulate you for this outstanding achievement which demonstrates the commitment of the project management and staff of NDD to the success of the SEC project.

Please accept my thanks and congratulations for such outstanding work.

Sincerely yours, . C- .. .' .)

Priscilla Del Bosyue Associate Director Trade and Investment

cc: Ismail Siam, Project Director

Appendix B Borrower Roflles

- * * I SECP BORROWER PROFILES

Profile Hi&uum&

Name: Gender: Business: Loan: Term:

Shadia is married with three children. In 1992, tragedy struck when her husband suffered a stroke. Blinded and partially paralyzed by the stroke, he was unable to continue to support the M y in his profession as a tailor. Shadia began to generate income by sewing dresses for people who brought their

Shadia Mahmoud Abdel Hameed Female . Tailor LE 1,000 5 months

own clotb to her. She used the macbine btt husband had worked with in the past.. Although income was generated, it was sporadic and fell short of meeting the family's needs.

When Shadia learned of the SECP program from her nejghbon, she proceeded to apply for a loan to enable her to break out of the fiomcial impasse which she faced. By securing a loan for materials to. produce dresses aod school uniforms, she no longer waits until someone brings materials for her to sew. The sale of ready made clothes has increased the income From her small business. Materials for a dress cost her LE 10, and she is able to sell a dress for LE 25. The additional income generated through the business allows the family to meet normal living costs plus medical expenses of the disabled husband.

Shadia is a firm believer in the benefits of the SECP program. She readily states that the SECP loan has given her family the means to help itself out of were economic difficulty.

Name: Arafa Mahmoud Ahmed Gender: Male Business: Wood products Loan: LE 2,0081 LE 3,000 . Term: 6 months18 months

Arafa owns a workshop whicb produces -* a variety of materials from native

Egyptian wood. An example is handles for shovels and hoes, which in the past required imported and expensive wood such as hickory. Arafa found that cafour and berries wood varieties from Egypt could produce the same durable handle at a fraction of the cost. The workshop also produces wooden chairs (balady) which are common in coffcebouses and shops throughout Egypt. The, same wood varieties are used to produce the chairs. .

SECP initially assisted with a loan for purchase of tbe rough wood stock which is obtained from rural arcas. At tbe time of the first loan for LE 2,000, Wee workers were employed in Arafa's small business. Though the ability to secure an adequate supply of raw materials, opportunities for increased production became apparent. An . increase in production and productivity was accomplished through the addition of two workers. Arafa was then able to demonstrate how a motor and two woodworking machines could further increase profitability. Having convinced Lhe Zamalak SECP Branch Credit Committee of the cash flow advantages of additional machinery, an investment loan of LE 3,000 was granted on an 8 month term. This increased profit and employment opportunity, available because of the presence of SECP credit, is yet another example of the positive impact of the SECP Program.

Name: . Tofaha F m g Ahmed Gender: Female Business: Tea/sandwich sales Loan: LE 2,000 Term: 8 months

I.

The Trade Building, just off Attaba Square in Cairo houses a multitude of workshops, many of them operated by small entrepreneurs. Tofaha Farag Ahmed has struggled with limited resources for 20 years serving tea a d sandwiches to workers from the 7th and 8th floors of the building. Now, with credit from the SECP, Tofaha is able to e m enough money to provide an adeqite standard of living for herself and her six children. Before receiving credit, she worked with an old butagas burner which proved inadequate in times of peak demand.

The SECP loan allowed Tofaha to more than double the productivity of her small food and beverage service through the purchase of a refrigerator, high capacity butagas tanks and two sets of gas burners. One set of burners is now devoted exclusively to preparing food. With the refrigerator, food now can be available whenever there is a need for it. Tofaha can now meet the needs of her old customers and bas the capacity to attract new customers. Without the loan, Tofaha would never have been able to purchase the quipment. She credits the assistance from SECP for a 50% increase in income.

Appendix C July 1995 Montbly Loan Production Analyses

Project Summary - Monthly Report (Entire W E Department of NBD) -

Break-even A ~ t y s i s Considering Cost of Fun& - Cost of Fun& and Fees Analysis -

Loans to Women - Number and Amount of Loans by Sector -

Savings Analysis - Borrowers Served -

- Agricultural Cooperative Development International 50 F Street, !;.W. ' Sulle 900 Werhlngh, D.C. 20001 ' Telephma: (202) 8364661 Fax : (202) 6288726

53 Wnlal St.. Sulte 700 Calro.11451, Egypt Telephone : (10) (2) ~33.36471553847244 Fu: 846WO

Mr. Magdy Khalil SEC Project Officer Office of Finance and Investment

-- USAIDlCairo 106 Kasr El Aini Street Garden City, Cairo

Date: August 17, 1995 Ref. : 0 19/009/95/SEPC

Ref: Monthly Loan Production Report July, 1995

Dear -W. Khalil,

Attached is a copy of the July 1995 report to meet the monthly reporting requirement of ACDI to' USAID. As always, the report has been prepared based on data provided by NBD. Included are the following:

Project Summary Monthly Report (Shows entire SME Department of NBD) Break-even analysis Considering 5% Reserves Break-even Analysis Considering Cost of Funds Cost of Funds and Fees Analysis Loans to Women (Cumulative) Number and Amount of Loans by Sector Savings Analysis Borrowers Served

This month, I have enclosed one additional sheet entitled 'Breakeven Scenarios" which our Financial Analyst first developed in June. Five scenarios are presented based on different assumptions. I wish to call your attention to two scenarios. Scenario 1 considers SECP cash revenue (without deduction for reserves) and cash operating expenses. Scenario 4 considers cash revenue with a 5% deduction for loan loss reserves. Expenses include all cost i.e. depreciation, an imputed cost of funds and cash operating expenses. SECP in July is covered 134% of costs based on Scenario 1 and 88% based on Scenario 4. Historical data is presented for each scenario. It is evident that SECP is making steady progress toward financial self sufficiency 3s measured by Scenario 4.

The progress made toward self sdliciency is mitigated by a continuing adverse trend in the "overdue" loans category. Overdue loans are those loans which have reached their final due date, and for which some amount of principal or fees are yet unpaid. At the end of July, there were 713 loans in this category totalling LE 909,861. While this amount is manageable, it represents a continuation of the

Maklng a World of Dlfkrence

adverse trend which began in May of this year. The TA Team has discussed this trend with -

management in the past. We will work with NBD on determining the causes for the increase, and .

explore possible solutions. -

As always, the TA Team would be pleased !o discuss any questions you have on this monthly report.

Team Leader

Enclosures: als CC. : Mr. Ismail Siam

Mr. Dave Davies

- ---- -

~xecutive ~ i r ec to r (SECP) Mr. Ismail Siam Headquarters 5A AI Borsa A1 Gadida St. Cairc # Of Branches (SECP) 64 of which 13 In SECP # Of Employees (SECP) 365 (NBD Total =2500) # Of Women Employees (SECP) 71 # Of Extension Officers (EO) (SECP) 140 Average # Of Out. Borrowers Per (EO) 115 Average # Of New Loans Per (EO) 23 Date End-use Lending Began July 1,1993 # Of Loans Disbursed (Women - Cumulative) 6,863 value (LE) Of Loans Disbursed (Women - Cumulative) 13,772,620 . Average Size Of Loans (Women - Cumulative) 2,007 # Of Loans Disbursed (July.) 3,171 Value (LE) Of Loans Disbursed (July) 8,277,900 Average Size Of Loans (July) 2,611 # Of Cumulative Loans Disbursed 54222 Value (LE) Of Cumulative Loans Disbursed 128,681,739 Average Size Of Loans 2,373 Average Length Of Loans 5 months Repayment Rate Y7.43Y0 Average Length Of Repeat Loans 6 months No. Of Repeat Loans 28,360 Value (LE) Of Repeat Loans 72,291,937 Size Of R e ~ e a t Loans 2.549 No. o f ~ e w Borrowers (July) 1;038 No. Of Borrowers (Cumulative 26,945 Average Interest dnte On 16% P.A.-flat - INT. ~oans-mominal) 3% P.A. flat - FEE - . Value (LE) Of Operating Income (July) 803,423 Value (LE) Of Operating Expenses (July) . 600,080 Break-even (July) 133.89% Value (LE) Savings Deposits (Outstanding) 4,6 17,740 No. Of Loans Outstanding (July) 16,046 Value (LE) Of Loans Outstanding (July) 31,263,060 Value (LEI Of Inslr rance (Otctstandin~I 2.317.258

Montlls of Outrtrnding Outstandine F a as r ./. of Antrual Irrterrrl Change NBD Disbursed COII~C~CII Amount or Amount or Fees Outrtrnding Intcrcst ~ r t l c Pf in cost ACDI Loans ~ o t m - Loans- Loans Rare Monlhly Frrnds of Funk

Ju1193 2,975,608 300,ooo 3,072,055 2,675,608 396,447 12.90% 12.00% 1.00% 0.00% Augl93 Sep I93 Oct I93 Nod93 Dec193 Jan194 Febl94 Marl 94 AprI94 May194 Jun\94 .Tun94 Aug194 Sep194 OcA94 Nod94 Dec194 Jan195 Feb195 Marl95

gi"5 JunI95 JuA95 .I-- -

SECP LOANS TO WOMEN ENTREPRENEURS AS OF 31-07-95 Branches Total Total 1Yp. NO. ofwornen Total Total Amounl Amount otWomcnlr AVG. AVG. &g &. of or- LOW u (%) or of loans &litmu& Loans as (%) of- of-

NBD - ACDI Loans Loans The Total Loans . ofTheTota1 Loans Loans

Giza 3,635 622 17.11 % 8,761,950. 1,426,300 16.28% 2,293 2,435 Helwan Shobra El Khima

El Sawah Garden CiW

llhr El Gedidah (Isfamic)

M i w El Gedidah (Comm)

Zamalek Bab El Louk El Azhar Kasr El Nil Opera Borsa

Total 54,222

SECP SA WNGS ANALYSIS AS OF 31-07-95 NBD - ACDI' Branches Pementage of Percentage 01 d!z!Ez of savlnPs To Et%z Snvinps To

Lonns Sarvlnps Giza 1,506,819 212,184 14.08% 2,437,889 8.70% Helwan 2,823,180 375,293 13.29% 4,3 18,477 8.69% Shobra El Khima 1,632,107 250,742 15.36% 2,750,218 9.12% El Sawah 4,993,885 751,391 15.85% 8,497,369 9.31% Garden City 2,340,150 310,517 i3.27% 3,553,397 8.74%

1 ~ i s r EI Gedidah (Islamic) 1,s 15,562 21 0,656 16.01% 2,113,523 9.97% blisr El Gedidah (Comm) 1,554,140 239,452 15.41 % 2,510,260 9.54% Zamalek 2,826,547 374,203 13.24% 4,612,608 8.11% Bab El Louk 2,163,825 298,792 13,81 YO 3,477,794 8.59% El Azhar 2,089,367 287,178 13.74% 3,300,867 8.70% Kasr El Nil 3,644,315 554,939 15.23% 6,792,224 8.17% Opera 2,677,210 388,9114 14.53% 4,481,900 8.68% Borsa 1,695,953 323,478 19.07% 2,661,902 12.15%

Total 31,263,060 4,617,739 14.77% 51,508,428 8.97%