Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 22320-BD

IMPLEMENTATION COMPLETION REPORT(IDA-29220)

ONA

CREDIT

IN THE AMOUNT OF US$105 MILLION EQUIVALENT

TO THE

PEOPLE'S REPUBLIC OF BANGLADESH

FOR A

POVERTY ALLEVIATION MICROFINANCE PROJECT

June 15, 2001

Finance & Private Sector Development UnitSouth Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective 05/01/2001)

Currency Unit = Bangladesh TakaBangladesh Taka 1.00 = US$ 0.0182

US$ 1.00 = Bangladesh Taka 55.00

FISCAL YEARJuly 01 to June 30

ABBREVIATIONS AND ACRONYMS

ADAB Association of Development Agencies in BangladeshADB Asian Development BankADP Annual Development ProgramASA Association for Social AdvancementBIDS Bangladesh Institute of Development StudiesCAS Country Assistance StrategyCEO Chief Executive OfficerERR Economic Rate of ReturnFRR Financial Rate of ReturnGOB Government of BangladeshHIRD Human Resource DevelopmentIGA Income Generating ActivitiesIGVGD Income Generation for Vulnerable Groups DevelopmentMES Monitoring and Evaluation StudyMFI Microfmance InstitutionMicrofmance I Poverty Alleviation Microfmance ProjectMicrofinance II Second Poverty Alleviation Microfinance ProjecthRRU Microfinance Research and Reference UnitMTR Mid Term ReviewPDR Public Demand RecoveryPOs Partner OrganizationsPROSHIKA Proshika Manobik Unnayan KendraVGD Vulnerable Groups Development

Vice President: Mieko NishimizuCountry Manager/Director: Fredrick Temple

Sector Manager/Director: Marilou UyTask Team Leader/Task Manager: Reazul Islam

FOR OFFICIAL USE ONLY

BANGLADESHPoverty Alleviation Microfinance Project

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 25. Major Factors Affecting Implementation and Outcome 66. Sustainability 77. Bank and Borrower Performance 88. Lessons Learned 129. Partner Comments 1210. Additional Information 14Annex 1. Key Performance Indicators/Log Frame Matrix 15Annex 2. Project Costs and Financing 19Annex 3. Economic Costs and Benefits 21Annex 4. Bank Inputs 25Annex 5. Ratings for Achievement of Objectives/Outputs of Components 26Annex 6. Ratings of Bank and Borrower Performance 27Annex 7. List of Supporting Documents 28Annex 8. Comparison of Impacts of Microcredit on Borrowers of Partner Organizations 30of PKSF

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not be otherwise disclosed withoutWorld Bank authorization.

Project ID: P040985 Pro ect Name: Poverty Alleviation MicrofinanceTeam Leader: Md. Reazul Islam TL Unit: SASFPICR Type: Core ICR Report Date: June 15, 2001

1. Project Data

Name: Poverty Alleviation Microfinance L/C/TFNumber: IDA-29220Country/Department. BANGLADESH Region: South Asia Regional

OfficeSector/subsector: FY - Other Finance

KEY DATESOriginal Revised/Actual

PCD: 04/26/1995 Effective: 10/03/1996 10/03/1996Appraisal: 11/01/1995 MTR: 08/01/1998 04/06/1999Approval: 09/17/1996 Closing: 12/31/2000 12/31/2000

Borrower/lImplementing Agency: GOB/MOFOther Partners: NONE

STAFF Current At AppraisalVice President: Mieko Nishimizu Joseph WoodCountry Manager: Frederick Temple Pierre Landell-MillsSector Manager: Marilou Uy Marilou UyTeam Leader at ICR: Joseph Pemia Abid HasanICR Primary Author: Reazul Islam

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HIU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: SU

Bank Performance: S

Borrower Peiformance: HS

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: No

Quality of Supervision HS

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:The project had two key objectives: (a) to reduce poverty through expanding horizontal and vertical outreach ofon-going successful microfinance programs; and (b) to enhance institutional and financial sustainability of PKSFand its Partner Organizations' (POs) credit programs through (i) financing expansion of lending, (ii) enhancing therole of PKSF from being a financier of small and medium-size POs to becoming an apex organization that lendsfunds to POs of all sizes, and acts as a catalyst in mobilizing enhanced levels of financial support from otherdonors and eventually from the market, (iii) assisting in institutional strengthening of PKSF and its borrowers byproviding resources for training and institution building, (iv) providing insight and possible solutions to severalissues/problems currently facing the microfinance system in Bangladesh by conducting a range of special studiesand associated training, and (v) disseminating best practices for increasing cost effectiveness of these programs.

3.2 Revised Objective:None.

3.3 Original Components:The project consisted of the following components: (a) a credit component for loans to the poor through eligiblePOs; and (b) an institutional development component to strengthen PKSF and its POs, enhance their institutionaland financial sustainability, and undertake broader microfinance development initiatives. The project had anestimated total cost of US$137 million, with a foreign exchange component of US$I million. It comprised a creditcomponent of US$131 million and an institution building component of US$6 million. The proposed IDA credit ofSDR 72.7 million (US$105 million equivalent) would finance 77% of the project cost; the government'scontribution would finance 7% (US$10 million equivalent); and the POs/borrowers' savings contributed theremainder 16% (US$22 million equivalent). Of the IDA credit, US$100 million was allocated to the creditcomponent and the remaining US$5 million to help finance the institutional development component.

3.4 Revised Components:Although the initial IDA allocation for the Credit component and Institutional Development (ID) component wasUS$ 100 million and US$5 million respectively, the allocation for these components was subsequently revised. Thiswas because PKSF could not utilize the amount allocated for construction of the PKSF office complex, allocatedunder the ID component. A transfer of US$2.42 million was made from the ID component to the Creditcomponent. The revised amounts of the Credit and ID components were as follows:

Credit Component: US$102.42 millionID Component: US$2.58 millionTotal Allocation: US$105 million

3.5 Quality at Entry:N.A.

3.6 Quality at Supervision.The Quality Assessment Group (QAG) review rated the quality of the project as highly satisfactory (ref: Quality ofSupervision Assessment (QSA4): Final Assessment dated November 16, 2000). The QAG review found the projectto be well designed in terms of stakeholders involvement, focus on beneficiaries and in anticipating problem areasto ensure that the objective of expanding vertical and horizontal outreach of the on-going microfinance programcould be successfully achieved. Main features of project design were: (a) it had sufficient flexibility to adjustoutreach, it allocated resources to build institutional capacity of POs and the price of lending funds was set so as toattain PKSF and POs' sustainability; (b) credit delivery methods were designed to ensure outreach and outcome; (c)it focused on institutional strengthening of the implementation agency; and (d) it established stringent criteria for

participating non-government organizations (NGOs) to ensure performance in microcredit delivery.

4. Achievement of Objective and Outputs

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4.1 Outcome/achievement of objective:4.1.1 The development objectives of the project were met in full. The first objective -- to reduce poverty throughexpanding horizontal and vertical outreach of microfinance programs -- was met. Microcredit was extended to thetarget poor to undertake income-generating activities (IGAs) to help increase income and improve quality of life,resulting in poverty reduction. The staff appraisal report (SAR) target was to extend outreach to 1.2 million people,but the actual outreach was 2.1 million, of which 90% were women. Hence, the actual target achievement was 75%higher than the SAR target.

4.1.2 The second objective -- to enhance institutional and financial sustainability of PKSF and the POs' creditprogram -- was also met (as discussed in para 4.2.2 and 4.5). Each of the sub-objectives of the second objectivewere fully achieved of which:

(a) PKSF expanded its financing in terms of loanees (para 4.1.1) and, in terms of credit volume, itsmicrocredit financing increased from Tk.470 million in FY96 to Tk.2,272 million in FY00. During the sameperiod, cumulative disbursements increased from Tk. 1,100 million to Tk.7,937 million and loans outstandingin the field rose from Tk.732 million to Tk.5,848 million;

(b) PKSF's role as a financier of small and medium-size POs has been exemplary. It has firmly establisheditself as a leading and successful apex organization to extend fund to microfinance institutions of all sizes. Asa result, the donors now consider IDA as the main channel to extend funds for microcredit through PKSF toultimate borrowers for meeting the objective of poverty alleviation. PKSF worked as catalyst to help mobilizefunds for a number POs. A large number of PKSF POs obtained credit funds from the Central Bank to extendsoft loans to POs' borrowers for housing improvement. BRAC. Proshika and ASA obtained funds from leadingcommercial banks (Agrani Bank and Sonali Bank) to extend microcredit. PKSF is also examining the optionsof providing guarantee for funds lent by commercial banks to NGOs for microfinance. These initiatives havehelped towards the integration of MFIs into the formal financial market;(c) PKSF's effort to enhance its own institutional capacity and assist in the institutional strengthening of POshas been satisfactory. PKSF has built a Management Information System (MIS), which is capable ofefficiently processing credit and other financial information to help the decision making process. A successfulpilot has been completed to integrate the MIS of PKSF and POs to facilitate efficient data processing andinformation flow. MIS integration will be extended to all POs under the next project, the Second PovertyAlleviation Microfinance Project (Microfinance II), which became effective from March 5, 2001. PKSF'sinitial training implementation performance was marginally satisfactory due to: (i) program overreach, and (ii)efforts to implement the in-house training program. However, since early 1999 the training implementationperformance has been satisfactory and during the last two years, PKSF had built adequate trainingimplementation capacity. PKSF's internal capacity has been strengthened to undertake efficient financialmanagement through creating separate Accounts and Audit Departments. The Accounts Department hasadequate professional staff and is supervised by an Advisor who is a senior Chartered Accountant withadequate professional experience. A full-fledged Internal Audit Department has been created with adequatestaff of required professional competence. The department head, a Deputy General Manager (Audit) nowensures 100% audit of all PKSF POs during the financial year;

(d) PKSF has been playing a leadership role to help develop the microfinance sector in Bangladesh. It hastaken active part in organizing CEOs' meetings of leading NGOs (ASA, Proshika and BRAC) during the 1998flood to implement various measures helping confront a crisis in the microfinance sector due to propertydamages to the borrowers. It has developed a number of standards in the microfinance industry which arecurrently being implemented by its POs and other MFIs/NGOs. It is currently working closely with theGovernment to formulate a legal and regulatory framework for the microfinance sector. Besides, it hasdeveloped a number of guidelines and policies with active participation of POs and stakeholders, to improveportfolio quality, accountability and sustainability of the microfinance industry, including: (i) management ofsavings, (ii) management of service charges, (iii) reduction in multiple member loans (overlapping), (iv)provisioning and default, and (v) utilization of disaster management funds; and

(e) PKSF has been actively involved in disseminating examples of best practices within and outside the

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country. For example, the microfinance standards and guidelines designed by PKSF are being used by manyNGOs/MFIs which are not participating in PKSF's program. It has firmly established itself as a leading andsuccessful apex organization to finance microfinance institutions of all sizes. In fact, a number of countriesare now learning from PKSF on how to set up apex financing organizations, including Kenya, Mexico, Brazil,Argentina and Nepal. PKSF has provided technical assistance to the Pakistan Poverty Alleviation Fund(PPAF) to strengthen its institutional capacity and to the Nepal Rural Microfinance Development Centre(RMDC) to develop its microfinance operations.

4.2 Outputs by components:(See 3.3)

4.2.1 Credit component: The implementation of the credit component was satisfactory in terms of outreach,supervision and monitoring, loan collection and impact (see para 4.1). The outreach in terms of borrowers was75% greater than the target established at project appraisal (para 9.3.1). The supervision and monitoring of POsand borrowers was regular and effective. PKSF designed a POs' Ranking System in terms of their performance tooptimize the use of supervision and monitoring resources. Major supervision resources were employed to supervisePOs, which showed performance average or below the norms established by PKSF, while POs with highperformance were more lightly supervised. PKSF has been very stringent about POs' performance. Because of theirlow operational, management and collection performance, it dropped 17 POs after collecting all loans from themand suspended loans to 12 POs, from which it is now collecting loans. As a result of this strategy, PKSF'scollection rate from the POs increased and has been maintained above 98%, on average, as per requirement of thefinancial covenant.

4.2.2 Institutional development component:

(i) Overall implementation of the institutional development component was satisfactory. PKSF now has avery strong MIS, as this component was implemented in full. Its training achievement was above 80% of target,although the target was ambitious and the emphasis on internal implementation of training provision was notappropriate [Para. 4.1.2 (c)]. This was corrected after the project's mid-term review (MTR) through substantialoutsourcing. This lesson has been a guiding factor to implement training under Microfinance II. The interest freeloan component to strengthen POs' logistics and supervision and monitoring capacity was met with very highsuccess. The entire allocated funds have been disbursed. Repayment was as high as 100% and the findings fromthe various workshops showed that it significantly enhanced POs' supervision and monitoring capacity.

(ii) The final monitoring and evaluation study (MES) was received by the Closing Date of the project. TheBangladesh Institute of Development Studies (BIDS) was, however, late by 12 months in submitting the MES'interim report. The supervision of MES improved after the MTR and the final report was received in time.However, the international workshop that BIDS was supposed to organize in December, 2000 will be held on June27 and 28, 2001. The construction of the PKSF's office complex has also been delayed due to complicatedgovernment procedures of transferring land title, grant of permission on an exceptional basis to let PKSF constructits own building and lack of procurement capacity of PKSF. However, delay in the construction of PKSF's officecomplex had very little impact on the project objectives and outcome, rather the saving from the buildingcomponent had been used for microcredit which helped to increase the project's outreach. PKSF has improved itsprocurement capacity, benefits of which will be realized under Microfinance II implementation.

(iii) IDA supported a Bangladesh Bank-executed study to formulate a Legal and Regulatory Framework for theMicrofinance Industry (1999). This study led to the formation of a Task Force. Based on the Task Force's report,the Government constituted a Steering Committee on June 18, 2000. This committee consists of eleven members,six from NGOs/MFIs or related sector and five from the Government or its agencies and is chaired by theGovernor, Bangladesh Bank. It will be responsible for developing the legal and regulatory framework for themicrofinance industry within the next three years (by June 17, 2003). To support the work of the SteeringCommittee, a "Microfinance Research and Reference Unit (MRRU)" was created in the Bangladesh Bank. MRRUwill be supported by PKSF through the Ministry of Finance to undertake wider consultations and in-depth analysisin the formulation of the legal and regulatory framework for the microfinance sector.

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4.3 Net Present Value/Economic rate of return:It is not meaningful to calculate NPV/ERR for microfinance activities, since all loans are for a maximum of oneyear and activities complete several cycles within this time period.

4.3.1 As microcredit loans are typically for one year, calculation of net present value (NPV) or economic rate ofreturn (ERR) is not appropriate. Cost benefit analysis (CBA) of microcredit activities is complex. Cost and benefitstreams are not totally accounted for and the costing of resources employed is often difficult. It is, therefore,meaningful to calculate the benefits of microcredit in terms of: (a) evaluation of the impact of microcredit activityat the household level, in terms of surplus to household income; and (b) calculation of annual return on investmentfor a number of major microcredit investments by assuming investments as one-year investments and comparingtheir retums with the microcredit effective rate of interest (see Annex 3).

4.3.2 Impact on households: A study of 84 families conducted for the purpose of project appraisal shows thatall families generated surplus (receipts minus payments) during the year. This was calculated by taking intoaccount the micro-investments already made, the loan installment already paid and the remaining loans to be paidoff fully during the year. Since these families are generating surplus, it is expected that they will be able to repaythe remaining loan installments as well. The contribution of microcredit to the family income has been found to besignificant. Families spent on an average Tk.21,751 as micro-investment. On average microcredit contributedabout Tk.83,000 per year as additional income in the form of family labor and profit. Contribution of microcreditas percentage of total family income has been found to be quite significant, in some cases as high as 90%.

4.3.3 Annual return of microcredit investments: All 84 microcredit investments studied have produced profits.The annual return on investment varied from 36% to 226%. The overhead cost and hired labor in most of theseinvestments were zero leading to very high annual returns. Activities with short business cycles, where moneycould revolve over and over within the year (e.g. trading, grocery shops, and restaurants) showed very high retums,while activities having long business cycles like poultry, fish farming, cattle fattening showed lower annual returnsduring the project period. However, the annual return in all cases has been found to be higher than the effectiverate of interest of microcredit, which varies from 18% to 26% annually.

4.4 Financial rate of return:Not applicable.

4.5 Institutional development impact:4.5.1 The institutional development impact of the project has been satisfactory. Enhanced capacity to implementthe credit program has been reflected in the quality of the portfolio. This is evident at three levels: (a) at the levelof PKSF, (b) at the level of partner organizations; and (c) at the level of borrowers. Under the project, efforts weremade to strengthen institutional capacity in various areas. These are: (a) enhancing the capacity to implement andmonitor the credit program; (b) strengthening govemance and accountability; (c) improving the financialmanagement system; (d) creating capacity to assess the impact of the program; and (e) designing policies tostrengthen the institution's effectiveness.

4.5.2 Conceming PKSF, institutional strengthening had a clear impact on its operations and overallmanagement. PKSF has been maintaining a strong and sound portfolio through better supervision and monitoring,and continuous POs skill upgrading. As a result, it has been able to consistently maintain a recovery rate of above98%. Recruitment of the chief executive officer (CEO) from the private sector improved PKSF's management andaccountability. Improvement of financial management provided sound intemal and extemal controls, whichincreased financial accountability and disclosure policies. PKSF's sponsorship of a longitudinal study and thedesign of an Impact Assessment Toolkit helped enhance PKSF's program focus on poverty targets. As a result,emphasis of Microfinance II has been to cover one-third of the target borrowers who fall under the purview ofhard-core poor. Various guidelines and policies designed by PKSF, with active participation of POs and thestakeholders, had profound impact on operations, portfolio quality, accountability, and sustainability of themicrofinance industry in Bangladesh [see para 4.1.2 (d)].

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4.5.3 At the PO level, institutional development had a direct impact on portfolio quality. Only 10% of PKSFPOs representing a 3% share of total PO's outstanding had recovery rates below 95%. Improved govemance hasensured selection of competent individuals as POs' Board members and exclusion of relatives of the ChiefExecutive as members. Moreover, regular Board meetings were ensured with proper agenda and recording of theminutes of meetings. These measures had a positive impact on governance, accountability and disclosure policy,which helped reduce irregularities in operations and financial management. The improved financial system had animpact on intemal and extemal financial management. Accounts and records up-keeping have improved andalmost all POs now have their accounts audited by extemal auditors. POs have also initiated measures to assess thepoverty focus of their program. As a Pilot, a few POs have already added Impact Assessment Toolkits to their MISand initiated data gathering for impact analysis.

4.5.4 At the borrower level, POs' institutional development had a positive influence on them. Skills andcapacity of the borrowers were enhanced under the project, which helped in utilizing increased amount of loansmore productively. As a result, borrowers experienced increased levels of income and economic wellbeing. Withregard to social impact, borrowers have increased their awareness about the need to improve their quality of life interms of self-literacy, enrollment of children to schools, use of better sanitation, clean drinking water andimprovement of housing. Overall empowerment of borrowers has been accomplished by their participation insocial and family decision-making, and in community work. IDA carried out a repeat study of the same set ofborrowers in March 1999 and March 2001 to assess the project's impact on borrowers. The following results showsustained socio-economic improvement of the borrowers compared to the time they received the first credit (fordetails see Annex 8):

* income increased in 1999 for 97.93% of borrowers and in 2001 for 98.72% of borrowers. Only 7 borrowers(1.28%) in 2001 reported the same level of income and none reported any decrease in income;

* quality and quantity of food intake by the family members improved for 88.59% of the borrowers in 1999 and98.72% of borrowers in 2001;

* clothing improved for 87.85% of borrowers in 1999 and by 98.91% of borrowers in 2001;* housing conditions improved for 75.26% of borrowers in 1999 and for 85.97% of borrowers in 2001;* child education improved for 75.41 % of borrowers in 1999 and for 87.7% of borrowers in 2001;* sanitation conditions improved for 68.74% of borrowers in 1999 and 83.24% of borrowers in 2001; and* quality of life improved for 94.96% of borrowers in 1999 and 95.63% of borrowers in 2001.

5. Major Factors Affecting Implementation and Outcome

5. 1 Factors outside the control of government or implementing agency:Two activities that suffered delays in implementation were: (a) formulating a Legal and Regulatory Framework forthe Microfinance Industry; and (b) procurement of the land for building PKSF's office complex. The first activitysuffered delays as the stakeholders were reluctant to regulate the industry since they believed it would hinderinnovation and impose controls on NGOs/MFIs [Para. 4.2.2 (iii)]. Concerning the second activity, land laws andpossession laws are so cumbersome that these substantially delayed PKSF's land procurement and hence theconstruction of PKSF's office [Para. 4.2.2 (ii)].

5.2 Factors generally subject to government control:The govemment exerted no control on PKSF's operations and management, which had a positive impact on projectimplementation. However, since PKSF is a govemment-sponsored agency, the govemment required that itsconstruction activities should be carried through the Public Works Department (PWD). It took considerable timefor PKSF to lift this restriction and as a result, the initiation of the office building construction process was delayedby about 24 months.

5.3 Factors generally subject to implementing agency control:Further delays in the construction of the office building were due to lack of PKSF's procurement capacity.Although, some capacity was acquired through Procurement Training sponsored by IDA, the effort should havebeen extended to cover larger numbers of PKSF staff. To address this, under Microfinance 11 a consultant has beenhired on a retainer basis to improve procurement performance and impart further procurement training to PKSF's

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Procurement Core Team (PCT) members.

5.4 Costs andfinancing:Of the total IDA contribution of US$105 million equivalent, there was an exchange loss of US$5.93 million due toexchange rate fluctuations between SDR (loan currency) and US dollars. As a result, the net amounts availablewere US$ 96.49 million and US$ 2.58 million equivalent for credit component and institution developmentcomponent respectively. The entire amount has been disbursed.

6. Sustainability

6.1 Rationale for sustainability rating:6.1.1 The project's sustainability rating of satisfactory was determined based on the following criteria: (a)borrower's graduation from the microcredit program (as a result of increased income, training, and empowerment);(b) POs' institutional and financial sustainability (ability to absorb increased lending cost and raise capital in thefinancial market); and (c) PKSF's decreased dependence on soft loans (i.e. increased ability to mobilize funds fromfinancial markets).

6.1.2 The process towards graduation of borrowers is reflected on their increased capacity to absorb higher loanamounts. The average loan size at the initiation of Microfinance 1 (1996) was Tk.2,500 per borrower. This averageloan size has now increased to Tk.5,800 per borrower, with the maximum loan per borrower increasing toTk. 15,000. Apart from the routine group-based training imparted during the weekly group meeting, someborrowers obtained skill development training to improve their capacity to undertake enhanced economic activities.As a result, borrowers' demand for higher loan amounts to set up microenterprises increased. Such activities willgenerate growth and employment opportunities for the hard-core poor. The social development outcome of theborrowers was profound in terms of their empowerment. Increased income and mobility, and greater involvementin major decisions of the households by women showed their increasing empowerment, relative freedom fromdomination by the family, and enhanced social awareness (para 4.5.4).

6.1.3 PKSF's institutional capacity has been enhanced [see para 4.1.2 (c)]. An institutional audit of PKSF,conducted by a team of consultants, sponsored by IDA and PKSF, showed that PKSF attained a significant degreeof institutional stability in terms of better management, improved MIS, and training program implementation.However additional enhancement of its capacity would further increase its effectiveness and reduce transactionscosts. Increased sustainability of POs' institutional capacity has been achieved through a comprehensiveinstitutional development plan (Business Plan), implemented by PKSF under the Project. PKSF's organization andfunctioning has attracted the interest of many countries.

6.1.4 Through institution building of the small and medium-size POs, their portfolio quality and absorptioncapacity have been enhanced resulting in a reduction of intermediation costs. This has enabled POs to absorbhigher lending rates as they progress toward sustainability. This is evident by the resilience shown by POs inmaintaining their portfolio quality in the 1998 flood, in which about 90% of POs maintained a collection rate ofabove 95% and improved govemance and accountability through reconstitution of the executive body andimproved disclosure policies. A study of 24 representative POs conducted by IDA and PKSF in 1999 concludedthat most POs were profitable albeit under the subsidized interest rates from PKSF funding. Out of 24 POs, 23 POswere meeting their full operational costs and 18 POs were meeting their full operational and financial costs(financial costs being the interest on savings at the rate of 6% and the borrowing rate at 3 - 4.5% per annum, plusthe provision of bad debt). A break-even analysis shows that 8 POs could sustain a borrowing rate of interestbetween 5-9% and 9 POs above 9%.

6.1.5 The decline in dependency of PKSF and POs on soft loans is also a sign of progress toward sustainability.This is evident from the following trends: (a) PKSF's reliance on soft funds will be substantially reduced from theYear 2005 because of increased capitalization of surpluses. PKSF's document Vision 2010 shows a substantialdecrease in the subsidized credit and grant components compared to its annual disbursements. For example, theratios of annual subsidized credit and grant funds (cash inflow) to annual loan disbursement to POs (cash outflow)are 62%, 36% and 17% for FY99-00, FY04-05 and FY09-10 respectively; (b) PKSF has been consistently

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generating surplus since FY90. During the implementation of the Project, its income increased from Tk.59 million(US$1.2 million) in FY97 to Tk.273 million (US$5.46 million) in FY00. A projection of PKSF's financialsituation to FYI 0 shows that these surpluses would allow PKSF to reduce its spread from the current 5% down to2% by 2006, which is typical of efficient financial institutions; (c) a number of POs are accessing funds fromcommercial banks. For example, Proshika has negotiated a loan from Agrani Bank for their microcredit program,BRAC is taking a loan from Sonali Bank and Agrani Bank for their microenterprise program, and ASA has takena loan from Agrani Bank for its program expansion. PKSF is also considering the possibility of providingguarantees for POs loans from the commercial banks for large-size POs and helping POs issue marketable bonds;(d) POs' absorption capacity to sustain higher capital costs has increased. For example, PKSF has increased thelending rate to small and medium-size POs from 3.5% (as was under Microfinance I) to 4.5% (under MicrofinanceII) and to large-size POs, from 5% to 7%. Hardening of borrowing costs from PKSF to POs will gradually promotetheir graduation to the formal financial market.

6.2 Transition arrangement to regular operations:N/A

7. Bank and Borrower Performance

Bank7.1 Lending:7.1.1 Microfinance I supported the GOB and CAS objectives of poverty alleviation, institutional developmentand broad based economic growth. The project design was sound in terms of stakeholder involvement, focus onbeneficiaries and anticipating problem areas to ensure that the objective of expanding vertical and horizontaloutreach of ongoing microfinance programs could be successfully achieved. The preparation of the project wascareful to build in flexibility in design, which improved implementation readiness. There was strong ownership ofthe project from the government and PKSF (borrower), which was reflected in their commitment to implement theproject successfully [QAG review].

7.1.2 The Bank's assessment of PKSF's capacity to implement the project was realistic. PKSF was establishedin 1990 under the sponsorship of the government to directly play a role in poverty alleviation by providingfinancial services to the rural borrowers through NGOs/MFIs. It already attained a high level of competence at thetime of appraisal of the project in early 1996. Bank's assessment showed that PKSF has established a system offinancial intermediation and its outcome was commendable. PKSF's staff competence was high as it recruitedpeople with high caliber and good motivation to work in rural microcredit. PKSF's strength also lay in itsindependent and strong Governing Board, comprised of microfinance practitioners, notable civil society membersand government representatives. Bank's assessment included a comprehensive institutional and managementevaluation. This led to the design of an institutional development package to enhance PKSF's capacity. Review ofthe management structure showed the need for a Chief Executive Officer (CEO), not nominated by thegovemment, but recruited from the private sector. The Memorandum and Articles of Association were amended torecruit the CEO from the private sector. The private sector CEO directly participated in processing the projectthrough the Board. The efficient monitoring and supervision, improved system of accountability and strengtheningof the internal audit unit were included within the project design to ensure effective project implementation andimproved portfolio quality.

7.1.3 The project design included an evaluation of three large-size NGOs and a selective number of small andmedium-size POs to examine their eligibility to access IDA fund through PKSF. The selection of large-size POs,namely, Bangladesh Rural Advancement Committee (BRAC), Proshika Manabik Unnayan Kendra (PROSHIKA)and Association for Social Advancement (ASA) were based on such evaluation. PKSF and IDA also reformulatedthe eligibility criteria to ensure selection of good NGOslMFls as PKSF POs. In this regard, emphasis was given tostrengthen governance, such as, prohibition of relatives of the management team to become members of theGoverning Body, and strengthen financial management and accountability.

7.1.4 The design of the project emphasized differential treatment between the large-size POs and the small andmedium-size POs in terms of their access to institutional development services and lending rates. Since the

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large-size POs have traditionally received long term capacity building assistance from the bi-lateral donors, thistype of assistance was extended under the project to small and medium-size POs together with preferential lendingrates to help them generate surpluses while they built up their loan absorption capacity, reduce transaction costsand build up equity to gradually attain sustainability in the medium to long-term. Access to grant funds forinstitutional development and access to funds at zero interest rate for improved logistics and building supervisionand monitoring capability were only available to small- and medium-size POs.

7.2 Supervision:7.2.1 A Quality of Supervision Assessment (QSA4) for FYOO carried out by a QAG panel of reviewers for theabove project rated the project supervision as "highly satisfactory overall". The summary of the panel assessment isas follows:

"The focus of the supervision missions on development effectiveness was exemplary. They paid particularattention not only to the implementation results on the ground but also to the long-term sustainability ofmicrocredit and partner institutions involved, the social impact on beneficiaries and the demonstration effect ofsuccessful non-formal microcredit programs on the formal financial sector. Staff continuity and the skill mix of thesupervision teams greatly contributed to the effectiveness of project supervision. A diversified staff in the countryoffice, including a social scientist, seems to have worked well as a team to produce results, which will contributemore broadly to sustainable improvements in institutions providing microcredit and improving the quality ofparticipating NGOs. A supportive and proactive management team was very helpful. Relations with the borrower,other stakeholders and other donors were well managed. Social development issues were particularly well handledwith development and monitoring of appropriate indicators. The impact on beneficiaries, by gender and income,was successfully tracked. Overall monitoring of progress and implementation performance was very effective. Asa result, the supervision of fiduciary/safeguard aspects was rated as highly satisfactory overall."

7.2.2 High quality of supervision was maintained through: (a) regular supervision from the field office; (b)bi-annual supervision; and (c) mid-term review of the project. Regular field office supervision has been veryeffective to resolve day to day implementation issues, which enabled the project to maintain high standards ofmicrocredit. The bi-annual supervision concentrated on broader implementation issues -- e.g. how to usesupervision resources optimally, whether the training implementation should be contracted out, and policy issues --which will help in making microcredit programs sustainable. The MTR concentrated on key implementation andpolicy issues and also a limited restructuring of the institutional development component to reduce the budget forconstruction of buildings and use the savings for microcredit. It also helped design the next operation, theMicrofinance II.

7.2.3 The supervision teams were composed of professionals with appropriate skills-mix to diagnose the majoroperational and implementation issues. Therefore, composition of the supervision missions changed depending onthe stage of implementation and the issues that the project confronted. The supervision teams included experts on:microcredit, financial analysis, financial management, institutional development, MIS, training, poverty reduction,social development, procurement and disbursement.

7.3 Overall Bank performance:7.3.1 Overall Bank's performance was highly satisfactory. Bank's performance was evaluated in terms of: (a)soundness of project design; (b) its assessment of the implementing agency in terms of its institutional capacity,management efficiency, ownership, commitment and poverty alleviation objective; (c) analysis of projectsustainability; (d) quality of supervision; and (e) actions taken and follow up. The QAG review of the projectrecognized the soundness of the project design and its in-built flexibility for effective implementation. IDA workedtogether with the government and PKSF to build a strong ownership of the project, which resulted in appointmentof a private sector CEO and improvement of management efficiency. QAG concluded that the Bank's performancein terms of supervision had been exemplary since it was proactive in identifying problems and prompt in initiatingremedial actions on them. For example, the Bank in consultation with PKSF conducted a Management Audit ofPKSF and identified a number of actions to improve PKSF's institutional capacity. As of June 2001, most of therecommendations made in the audit report had been implemented.

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7.3.2 The Bank was also able to build a sustainable relationship with PKSF and the government. As aconsequence, its role in microfinance has been highly recognized and appreciated by GOB, PKSF, NGOs/MFIs andthe donors. It is now considered to be the donors' main channel to provide funds for microcredit to meet theobjective of poverty alleviation. The Bank's objective to help the microfinance industry become part of the formalfinancial market is being gradually achieved by selective POs through NGOs/MFIs institutional development, theircapacity to absorb higher borrowing costs and their ability to access market funds from the formal sector.Although, a HRD study was not conceived under the Microfinance 1, the need for such study to improve personnelpolicy and development is greatly felt. Therefore, PKSF has commissioned a HRD study under Microfinance 11.

Borrower7.4 Preparation:7.4.1 GOB and PKSF actively participated in project preparation. Prior to project preparation, the governmentconstituted a Task Force in early 1995 for preparing a Poverty Alleviation Project, chaired by the Secretary,Ministry of Finance. IDA financed a consultant who assisted the Task Force to complete the report on July 5, 1995.Based on the Task Force report, IDA prepared the project. GOB and PKSF were very supportive during thepreparation of the project. The Secretary, Banking Division directly took part in the preparation and helped inaddressing the issues that arose during project preparation and implementation. PKSF's staff and managementshowed strong ownership and commitment to the project. Its staff quality was high and they were very proactive inproviding information, preparing materials and arranging site visits for the project. They also directly participatedin the preparation, pre-appraisal and appraisal missions and provided necessary inputs to these missions. Becauseof GOB and PKSF's support, the project took about 20 months from the preparation to the Board presentation(compared to an average of 24 months).

7.4.2 The project was prepared following a participatory approach. The Managing Director of PKSFparticipated in the Task Force meetings and also contributed to the preparation of the Task Force report. PKSF'sBoard had several meetings with the Task Force to discuss the modalities of credit delivery services, extent ofPKSF's expansion in terms of outreach and portfolio, and policy measures to avail IDA credit for microcredit.These interactions were very helpful in terms of: (a) awareness building of the Governing Board members aboutthe Project's objectives and components in relation to PKSF's future expansion program; and (b) preparation of aTask Force report, which had broad consensus by the Board members and was used as a key document fordesigning the project. Furthermore, PKSF had several intemal discussions among the staff on the project conceptand design in order to examine the quality and implementation of the project. The project concept was furtherdiscussed with the Association of the Development Agencies in Bangladesh (ADAB), representatives ofNGOs/MFIs (small, medium and large-size such as ASA, BRAC and Proshika), civil societies and concernedagencies. The design of the project benefitted substantially from the outcome of these discussions.

7.5 Government implementation performance:7.5.1 Government performance was exemplary on various aspect of project processing. It was the government'sstrategy to scale-up PKSF's credit program through a soft loan instead of a grant from the government. This wasconsidered feasible because PKSF's performance in credit wholesaling to NGOs/MFIs had been of high standards.The Finance Secretary appointed a highly qualified Task Force for preparing the project and assigned theSecretary, Banking Division to coordinate the preparation work. Moreover, the Government was very proactive inensuring adequate and proper coordination between the Goveming Body members of PKSF and IDA to resolvecritical issues on lending rates, modalities to channel funds to large-size NGOs, and project implementationrelationship between PKSF and IDA. The Government decided to negotiate the project in Bangladesh to allow alarger number of stakeholders to participate in negotiations, which is usually not the case.

7.5.2 The Government made several special provisions under the Project. Some of these are: (a) it on-lent toPKSF with a highly concessionary rate of interest of 1% with payment term of 20 years, including 5 years graceperiod. The foreign exchange risk was also borne by the Government. Such concessionary terms and conditionswere agreed to because the project objective coincides with the Government's poverty alleviation objective; (b) theGovernment provided US$5 million as a grant to PKSF to build its and POs' institutional capacity and alsoprovided an additional loan of US$10 million from its own resources at IDA onlending terms and conditions; and(c) the Government, on a exceptional basis, kept the entire IDA loan to PKSF outside the Annual Development

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Program (ADP). Besides, the Government agreed to replace its Chief Executive Officer with a private sectorexecutive. It also reduced its membership in the Board from 4 to 3 members and during the last two years, it didnot nominate any active civil service members to the Board, so that all the government nominees are now retiredcivil servants. This is a clear sign that the government is slowly distancing itself from PKSF's business affairs.

7.6 Implementing Agency:7.6.1 PKSF's performance has been highly satisfactory. It showed strong ownership of the project during thedesign, preparation and implementation. It maintained a strong identity of its own and kept itself outside theinfluence of the government. This helped PKSF to earn a good reputation in the microfinance industry and thus ishighly respected by the stakeholders. These results were possible because PKSF's Governing Board was composedof respected personalities known for their integrity and dedication including Dr. Yunus, Managing Director,Grameen Bank and Professor Mahmud, ex-Advisor to the Caretaker Govemment (1996). The Board showed strongownership to the project by having regular Board meetings and participating in taking major implementation andpolicy decisions. Furthermore, some Board members are from NGOs/MFIs, and therefore, provided valuableinputs to help the Board in resolving issues and formulating policies to develop a sound microfinance sector.

7.6.2 PKSF management also acquired necessary skills during project implementation. It strengthened its staffcapacity, hired additional staff with required skills where such skills were not internally available, andstrengthened supervision capacity by hiring new management trainees for its credit program. Thus, PKSF hired anMIS manager, a Head of the Internal Audit Department, a Financial Advisor to look into its overall financialmanagement system and an Economist to oversee the research and development unit. It also separated itsoperations and management of large-size POs and small and medium-size POs through separate windows. PKSFmaintained a good POs' monitoring system by regular supervision on a quarterly basis schedule. POs'performances are discussed at PKSF's monthly coordination meeting under the chairmanship of the ManagingDirector. This strict monitoring enables PKSF to undertake timely action on POs that fail to perform, ensuring aquality portfolio.

7.6.3 PKSF is taking the lead to develop the microfinance sector in Bangladesh to make it sustainable. Becauseof its reputation and standing in the microfinance industry, all stakeholders support such endeavor. PKSF isplaying an important role in the coordination process of small, medium and large-size POs. For example, it led thecoordination of all NGOs during the 1998 flood, organized meetings and developed policies to reduce theoverlapping of loans by the borrowers, and initiated the development of microfinance standards for the industry. Ithas also developed various useful policies and guidelines for its POs (see para 4.5.2). Implementation of thesepolicies by all other NGOs/MFIs will have a profound impact on their capacity building and sustainability to accessfunds from the formal sector market.

7.6.4 Bangladesh Bank implemented the MFI's Regulatory Framework Study satisfactorily. To ensure broadbased support of the stakeholders, the Govemment constituted a Steering Committee to formulate the legal andregulatory framework for the microfinance industry by June 17, 2003 [see para 4.2.2 (iii)]. Bangladesh Bank istaking an active role in coordinating with the government and NGO/MFls to complete the formulation of the legaland regulatory framework within the stipulated time.

7.7 Overall Borrower performance:7.7.1 Overall Borrower performance is highly satisfactory (Para. 2). This has been the outcome of the "PKSFlimited due diligence study" undertaken as preparation for Microfinance 11 (which became effective on March 5,2001). However, for PKSF to continue leading the microfinance industry in Bangladesh (as it is already financingthe large NGOs/MFIs [BRAC, Proshika and ASA]), it has to further improve its institutional capacity. PKSF'smanagement and the Board are committed to this and, therefore, further strengthening of PKSF has beenaccommodated under a technical assistance component in Microfinance II. GOB's performance has also beenhighly satisfactory ( para 7.4.1 and 7.5). Its support to PKSF will continue as it is the only institution, which isimplementing the GOB's poverty alleviation strategy in a successful and effective manner. The partnerorganizations' performance has been satisfactory (see paras 4.5.3, 6.1.3 and 6.1.4). The quality of their portfolio issound and they have been maintaining a high collection rate (see Annex 1) as required by the Credit covenant. Alarge number of POs are now meeting the operational and financial costs and their absorption capacity for

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handling a larger portfolio, showing a clear sign of enhanced sustainability (Para. 6.1.3).

7.7.2 The performance of the ultimate borrowers in terms of the impact of the microcredit is also highly positive(paras. 4.3.1, 4.3.2, 4.3.3, and 4.5.4). There are increased signs of economic well-being of the borrowers in termsof use of increased loan size amounts, diversification of activities, scaling up of income generating activities tomicroenterprise loans, and changes in quality of life in terms of increased income, access to basic needs andempowerment.

8. Lessons Learned

The following lessons have been learned from implementation of the project:

* Strong institutional development efforts are needed for POs to become sustainable in accessing market funds.* Intensive supervision and monitoring of POs by skilled staff of APEX institutions such as PKSF with

sensitivity to clients is essential for maintaining portfolio quality.* A rating system for POs is useful at apex institutions such as PKSF for managing risk related to resource

allocation and provide early warning of problems.* A "business plan" showing its strategic goals, expansion plans, institutional development needs, and measures

to attain them, is a useful management tool for apex institutions and its POs (being implemented underMicrofinance II).

* Evaluation of the creditworthiness, institutional capacity, and empowerment efforts of all POs (small, mediumand large-size POs) is necessary to make a sustainable positive impact on borrowers.

- Review of the POs' interest rate policy to absorb the cost of funds and to raise capital in financial markets isessential to achieve sustainability.

- A human resource development (HRD) policy for apex institutions and POs is required to promote staffmotivation and ensure their career paths for efficiency and sustainability of the sector (being implementedunder Microfinance II).

9. Partner Comments

(a) Borrower/implementing agency:9.1 Project formulation:The Govemment of Bangladesh (GOB) recognized microcredit's potential as an instrument for poverty reductionin the early eighties. This was reflected in the creation of Grameen Bank in 1983. GOB also sponsored somemicrocredit programs in the eighties, which were being implemented by different government agencies like theBangladesh Rural Development Board (BRDB) and the Nationalized Commercial Banks (NCBs) in the eighties.GOB established PKSF in 1990 in order to promote microcredit largely through NGOs. However, PKSF in itsinitial stage could not support the NGOs' microcredit program in a large scale due to fund constraints. In thiscontext, the Poverty Alleviation Microfinance Project was prepared with the participation of the key stakeholdersi.e. GOB, PKSF, MFIs and IDA during an IDA appraisal mission in November, 1995. The project was negotiatedbetween GOB and IDA in April 1996 and the credit became effective on October 3, 1996.

9.2 Project Objective and Description:

9.2.1 The project had two key objectives: (a) to reduce poverty through expanding horizontal and verticaloutreach of on-going successful microfinance programs; and (b) to enhance institutional and financialsustainability of PKSF and Partner Organizations' (POs) credit programs through (i) financing expansion oflending, (ii) enhancing the role of PKSF from being a financier of small and medium-size POs to becoming anapex organization that would lend funds to POs of all sizes, and act as a catalyst in mobilizing enhanced levels offinancial support from other donors and eventually frorn the market, (iii) assisting in institutional strengthening ofPKSF and its borrowers by providing resources for training and institution building, (iv) providing insight andpossible solutions to several issues/problems currently facing the microfinance system in Bangladesh by conductinga range of special studies and associated training, and (v) disseminating best practices for increasing costeffectiveness of these programs.

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9.2.2 The project had two components: (i) credit; and (ii) institutional development. Under the creditcomponent the project provided for lending US$110 million equivalent to PKSF; US$100 million equivalent fromIDA and US$10 million equivalent from GOB for on lending to its small, medium, and large-size POs. Under theinstitutional development component, the project allocated US$6 million (US$5 million from IDA and US$1million from PKSF) equivalent for institutional development, of which US$5.85 million was ear-marked forstrengthening institutional capacity within PKSF and its POs, and the remaining US$ 0.15 million for a study onregulatory framework which was implemented by the Bangladesh Bank. The project-supported training andinstitution building programs were to be focused towards PKSF and small and medium-size POs.

9.3 Project Performance:

9.3.1 Outreach and Impact:(i) The overall performance of the project has been highly satisfactory. PKSF, through its POs, providedmicrocredit to more than 2 million poor borrowers against the target of 1.2 million. The outreach, thus, was 75%above the target. The poor borrowers, 90% of who are women, utilized the credit for undertaking various incomeand employment generating activities.

(ii) The project has significantly contributed to poverty alleviation. The microcredit program implementedunder the project has benefited the poor in more than one way. The program has improved their standard of livingthrough diversification and strengthening of their survival strategies; enhanced their security giving them access toassets and rights; and augmented their self-respect by providing them choice and independence.

9.4 Instituitional Development:The implementation of the institutional development component of the project met its objective. Both PKSF's andPOs' staff were trained; MIS has been strengthened; financial sustainability has been enhanced; and accountabilityand transparency have been further strengthened. PKSF, however, could not utilize the funds allocated for officebuilding construction, because of complex government procedures on land transfer to PKSF and delays inobtaining government approval for PKSF to construct its own building rather than using the government'sdepartment.

9.5 Disbursement:Disbursement performance of the project was highly satisfactory. Of the credit amount of US$105 millionequivalent at the time of project approval, an exchange loss of US$ 5.93 million took place due to exchange ratefluctuations between SDR (loan currency) and US dollar. The present credit amount is US$99.07 millionequivalent and the entire amount has been fully disbursed. IDA agreed that PKSF could utilize the entire savings ofthe Credit to fund the microcredit component.

9.6 PKSF Partner Organizations (POs):

9.6.1 PKSF implements its microcredit program through its POs. PKSF, as of December 31, 2000 enlisted 195POs of which 64 were enlisted during the project period. Of the 64 enlisted POs during the project period, 63 weresmall and 1 (one) was large. Of the 195 POs, PKSF dropped 17 POs, as they could not meet the operationsstandard of PKSF. All funds were withdrawn from the dropped POs. PKSF had 178 POs when the project wasclosed in December 2000.

9.6.2 POs have enhanced their capacity to manage microcredit programs over the years, which is reflected intheir performance - their beneficiary coverage has increased substantially and their loan repayment rate to PKSFhas been very high - that is above 98%. About 90% of the POs have achieved financial viability. Many of the POsare also implementing various social development programs alongside microcredit program. POs have made asignificant contribution to poverty alleviation during Microfinance I.

9.6.3 In view of the experience stated above, the necessity for consolidating the impact gained through the

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successful completion of Poverty Alleviation Microfinance Project-I (IDA Credit No. 2922 BD) was urgently felt byGOB and accordingly the Second Poverty Alleviation Microfinance Project (Microfinance 11) was prepared andnegotiated in November 2000 and the credit became effective in March 2001 (Cr. 3457 BD).

(b) Cofinanciers:The project did not have any cofinanciers.

(c) Other partners (NGOs/private sector):PKSF on a regular basis maintained contact with other NGOs, besides its POs. It provided guidance to other NGOson operational and management issues. It also represented NGOs/MFIs interest with the government on matters ofregulatory framework, housing loans, community development, etc. Although its interaction with the private sectoris currently limited, the private sector finds PKSF and its POs as a good network to deliver commercial, financialand other services. For example, a number of insurance companies have initiated some insurance products(microinsurance) to bring low-income group under the insurance network. PKSF will have an important role inoverseeing this market as well as other commercial activities that are being initiated by the private sector.

10. Additional Information

None

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome I Impact Indicators:

Indicator/Matrix L Projected in last PSR Actual/Latest Estirnate(a) No. of borrowers reached; 1.2 million 2.19 million(b) Increase in income and assets of 10% increase per year More than 15%borrowers;(c) No. of POs attaining Financial viability; 60% by FY2000 86% *(d) PKSF attaining financial viability on its Interest income on loans as % of total Interest income on loans as % of totalcredit operations; and expense: 130% expense: 177%(e) Repayment rates remain at or above 98% POs to PKSF: >98% POs to PKSF: 98.53%for PKSF and 95% for POs. Borrowers to POs:>= 95% Borrowers to POs: 98.25%

End of project

*1 8 out of 21 POs are financially self-sufficient, that is, they can fully recover their operating and financialexpenses from the income of microcredit [source: A study on the sustainability of the Partner Organizations of PalliKarma Sahayak Foundation (PKSF), conducted by IDA, April 1999].

Summary of Output Indicators

Indiicator/Matrix Measure (Performance Actual/Latest Estmatet _ . . ~~~T*a etsa

A. PROJECT INPUTIncrease funds available Loan disbursement to POs PKSF's annual loan disbursement to POs has increased from Tk. 470to POs million in FY 1995-96 to Tk. 2,272 million in FY 1999-2000 (an

increase of 700%). During the same period, outstanding loansincreased from Tk. 732 million to Tk. 5,848 million, i.e. by 700%.

Increase funds for Grant funds disbursed PKSF disbursed a total amount of US$ 2.58 million equivalent asInstitutional grant for institutional development during the project period. It didDevelopment not disburse any grant fund for institutional development of POs

before this project.

B. BENEFICIARIES: OUTPUTS, OUTCOMES, AND IMPACTIncrease outreach No. of borrowers reached No. of borrowers has increased from 0.44 million to 2.19 million

(1.2 million by December during the project period of October 1996 to December 2000, i.e. an2000, over 90% of whom absolute increase of 1 .75 million. 90% of these borrowers are women.to be women)

Increase loan size Average loan size is to be Average loan size of borrowers increased from Tk. 2500 to Tk. 5,800about Tk. 6-7 thousand by December, 2000. Average loan size would have increased further,against the average loan of but instead the number of outreach increased by an additional 75% ofcurrent borrowers of the target outreach.PKSF's POs of about Tk.2,500.

Increase in borrower Monthly consumption 89% of the borrowers reported improvements in quality and quantitywelfare expenditure of food intake.

Health indicator 69% of the borrowers reported improvements in sanitation conditions.Educational indicator 75% of the borrowers reported improvement in child education.Increase in income and Family income increased by more than 15%.assets (10% increase infamily income per year)

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C. PKSF: OUTPUT, OUTCOME, AND IMPACTFinancial Aspects December, 2000

Enhance financial Maintained collection rates Collection rate has been consistently maintained over 98% during thesustainability (98%) project period.

Reduction in principal and This amount decreased from Tk. 2.51 million (March 1997) to Tk.interest on Loans overdue 1.54 million (Dec. 2000).(0-90 days)Increase in principal and This amount increased from Tk. 1.81 million (March 1997) Tk.2.61interest on Loans overdue million (Dec. 2000). i.e. loans overdue to loan outstanding ratio(91-180 days) decreased from 0.20% to 0.04%.Increase in principal and This amount increased from Tk. 11.10 million (March 1997) Tk.interest on Loans overdue 41.42 million (Dec. 2000). i.e. loans overdue to loan outstanding ratioover 180 days decreased from 1.50% to 0.70%.Bad debt/loans written off NilDecrease in administrative This ratio decreased from 4.61% (June 30, 1996) to 1.92% (as oncost as % of loans 30th June, 2000).disbursedIncrease in interest income This ratio increased from 90.14% (June 30, 1996) to 176.60% (as onon loans as % of total 30th June, 2000).expense (130% byFY2000)Increase in net income as This ratio increased from 2.39% (June 30, 1996) to 3.4% (as on 30th% of total assets June, 2000).Review on-lending rates On lending rates have been reviewed and increased from 3-4.5% to

4.5% for small and medium-size and from 5% to 7% for large-size_____________________ _POs under Microfinance II.

Institutional StrengtheningImprove MIS Conversion of existing Development of software required for computerized MIS has been

database to computerized completed. The software has been installed.system by February 1998

Tighten audit standards Issuance of audit Issued on April 21, 1996.guidelines by January 1997

Establish loan Issuance of guidelines by Issued on February 26, 1997.classification policy March 1997Strengthen PKSF's Preparation of medium Prepared.financial planning term financial projectionscapacityEstablish financial Incorporate performance Incorporated on February 23, 1998.sustainability indicators in eligibilityperformance standards guidelines by August 1997for POsEstablish impact Periodic Survey reports Done on February 1999.evaluation programIncrease training No. of persons trained and Before the project, 697 PO staff covering 1394 trainee days were

type of training imparted trained and no PKSF staff received training. During the projectperiod, 2736 PO staff covering 8210 trainee days and 163 PKSF staffcovering 2418 trainee days have been trained locally. Training hasbeen increased by 293% for POs staff. 45 PKSF staff covering 641staff days have been trained through foreign study tour and training.

Establish program of Initiate interest-free loan Initialed on December 3, 1997.interest-free loans to program by April 1997POs, for institutionalbuilding

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Formulate guidelines on Implementation of An accounting Manual incorporating guidelines on uniformuniform accounting guidelines to POs by July accounting policies has been formulated for POs in October 1997. Allpolicies 1997 POs are following a standard double entry accounting system since

1994. Significant progress has been made with respect to adoption ofan accrual basis of accounting by POs, according to the Manual.

Strengthen audit Intemal Audit Department An Intemal Audit Department has been created and each PO is beingto audit each PO twice a audited once in a year by this Department.yearExternal Auditor to audit External Auditor has audited 31% POs in FY1995-1996; 30% inone-third POs each year FY1996-1997; 35% in FY1997-1998; 48% in 1998-1999 and more

than 75% of the POs in FY1999-2000.

D. POs: OUTPUT, OUTCOMES, AND IMPACTFinancial Aspects December, 2000Enhance financialsustainability of Maintain loan collection Loan collection rates have been maintained consistently over 95%financial services rates at 95% during the project period, only 10% POs failed and these wereprograms. dropped as PKSF POs.

Decrease total This ratio decreased from 8.70% (June, 1997) to 4.23% (as on Juneadmin/operating costs as % 2000) for small and medium-size POs, although for large size POsof loan disbursed this ratio marginally increased from 9.51% (Dec. 1997) to 9.54%

(Dec. 1999)Increase interest income on This ratio increased from 135.64% (June 1997) to 157.52% (as onloans as % of total June 2000) for small and medium-size POs and for large size POs thisadministrative/operating ratio increased from 110.45% (Dec. 1997) to 128.72% (Dec. 1999).costsInterest rate charged to Interest rate charged to beneficiaries was not controlled and remainedbeneficiaries should not be unchanged at 10 to 15%.controlledIncrease number of POs 86% of POs have attained financial sustainability.attaining financial viability(60% by FY2000)Increase savings as % of This ratio has increased from 35.52% (Sept. 1996) to 49.69% (Dec.loan outstanding 2000).

Institutional IndicatorsImprove Accounting and Increase number of POs All the POs are following double entry accounting system and usingAudit Standards meeting accounting customized subsidiary ledgers suggested by PKSF. Efforts have been

standards taken to adopt accrual basis of accounting by POs. Significantprogress has been made in this regard.

Increase number of POs Before the project, only one PO used external auditors; at the end ofusing external auditors the project, 130 POs used external auditor.Increase number of POs Before the project, no PO followed loan classifications! provisioningfollowing loan guidelines. At the end of the project, all the POs followed the loanclassification/provisioning classification/provisioning guidelines.

._____ __ _ g uidelinesNumber of Participating 178 178POs

E. BANGLADESH BANK

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Establish proactive Complete study by July Bangladesh Bank executed a study on "Establishing an Appropriatepolicies and regulatory 1997 and initiate Regulatory Framework and Institutions for Regulating MFIs Engagedframework for MFIs implementation program in Deposit Taking/Lending and Developing Financial, Institutionalwanting to be formal and Regulatory Measures to Assist MFIs in Becoming Formalfinancial institutions Financial Institutions and Strengthening the Linkage of MFIs with the

Formal Financial Sector (1999)". This study led to the formation of aTask Force by the government on October 19, 1999 to examine theneed for a legal and regulatory framework for the microfinanceindustry. The Task Force in its report of March 30, 2000recommended the formation of a "Steering Committee".

Establish appropriate Complete study by July The government constituted a Steering Committee on June 18, 2000regulatory framework 1997 and initiate to develop a legal and regulatory framework for the microfinancefor deposit-taking implementation program industry within the next years (by June 17, 2003). A "MicrofinanceNGOs Research and Reference Unit (MRRU)" was created in Bangladesh

Bank to help the Steering Committee to undertake the assignment.

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Annex 2. Project Costs and Financing

Project Cost by Component (in USS million equivalent)I Project Cost By Appv WEstimaft Actatatest Estimate Pdr4eif

Component US$ In d _ USS in million _ ApprasaLocal Foren Total Loca Fore4 n Total , __

Credit component 131.00 131.00 96 161.22 161.22 99 123Institutional 5.00 1.00 6.00 4 2.21 0.15 2.36 1 40DevelopmentTotal 136.00 1.00 137.00 100 163.43 0.15 163.58 100 119Total Project Costs 137.00 163.58Total Financing Required 137.00 163.58 _

Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ Million Equivalent) IDComponent

Expenditure Procurenent Method Total Cost! Category ICB NCB Others1. Works 0.00 3.00 0.00 3.00

I0.00) (2.23) (0.00) (2.23)2. Goods 0.00 0.60 0.45 1.05

(0.00) (0.47) (0.35) (0.82)3. Services 0.00 0.00 1.95 1.95

(0.00) (0.00) (1.95) (1.95)Total Cost 0.00 3.60 2.40 6.00

(0.00) (2.70) (2.30) (5.00)

Project Costs by Procurement Arrangements (Actuall Latest Estimate) (US$ Million Equivalent):

ID Component

Expenditure Procurement Method Total CostCategory ICB NCB Others

1. Works 0.00 0.37 0.04 0.41(IDA) (0.00) (0.30) (0.03) (0.33)

2. Goods 0.00 0.40 1.27 1.67(IDA) (0.00) (0.32) (1.02) (1.34)

3. Services 0.00 0.00 1.03 1.03(IDA) (0.00) (0.00) (1.03) (1.03)

4. Miscellaneous 0.00 0.00 0.02 0.02(I DA) 0.00 (0.00) (0.02) (0.02)

Total Cost 0.00 0.77 2.36 3.13(I DA) (0.00) (0.62) (2.10) (2.72)

Notes:

I. Amounts in parenthesis are IDA financed

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2. In expenditure category 3 (Services) expenditure equivalent of US$ 0.15 million incurred byBangladesh Bank is included.

Project Financing by Component (in USS million equivalent)

Local 104.00 10.00 22.00 98-62 10.00 54.81 94.82 100 249Foreign 1.00 O O 0.15 O O 15 Total 105.00 10.00 22.00 98.77 10.00 54.81 94 100 249

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Annex 3: Economic Costs and Benefits

Microcredit programs are based on the assumption that the rural poor have the capacity to invest and managemicro-businesses and that there are opportunities in the rural economy for such investments. All PKSF's POsprovide loans for investments proposed by borrowers. Most investments of microcredit borrowers go to areas suchas poultry and livestock rearing, petty trade of numerous items, weaving/handicrafts/pottery, agro-processing andrural transport (rickshaw/van) etc. The petty trade may include any item from shop keeping to seasonal trading.Borrowers are expected to make profits from their investments and repay loan installments from their income.Additional income is used for consumption and savings. This process leads to improvement in quality of life andaccumulation of assets.

Cost benefit analysis of microcredit activities is complex. As the microcredit loans are typically for one year, thecalculation of the financial rate of return (FRR) or economic rate of return (ERR) would not be a meaningfulexercise. Moreover, cost and benefit streams are not totally accounted for and the costing of resources employed isoften difficult. It is, therefore, meaningful to calculate the benefits of microcredit in terms of the following:

1. evaluation of the impact of microcredit activity at household level in terms of surplus to household income;and

2. calculation of annual return for a number of microcredit investments by assuming the investments as one-yearterm investments and comparing their retums with the microcredit effective rates of interest.

Methodology:

It is possible to estimate the incremental impact of microcredit on household income. This can be done bydeveloping a receipt-payment profile of the household for a period of one year, and by accounting all cash inflowsand outflows of the household for one year, including the inflow due to microcredit borrowing. Microcredit has twoinflow items in the form of income: net profit from an activity and income earned as a labor of family memberswho usually run the activity. In computing the net profit from the activity an expense component has beenestimated for family labor that depends on the amount of time employed by family members and the on-going wagerate in the area. The inflows to the family have been divided into six main categories: (a) income of the familyfrom sources other than microcredit investment; (b) gifts received by the family; (c) additional borrowing fromsources other than the PO; (d) contribution from income generating activities such as family labor; (e) borrowingfrom PO; and (f) net profit from the income generating activity. The outflows have been categorized into: (a)household consumption expenses; (b) micro-investment; and (c) loan repayments.

Determination ofannual return: An analysis of 84 microcredit investments has been conducted to determine theannual return of each of the activities. Each activity has been analyzed to develop an income-expenditure profile.Net profit has been determined by deducting all expenses including family labor from revenue of the activity. Firstof all revenue and expenses have been determined for one cycle of business and then annualized based on thenumber of cycles that can be realistically completed within one year leading to determination of annual profit. Theannual return has been determined using total investment in the activity, both equity and borrowing from the PO.Aside from computing the annual return for each of the activity, an average annual return for each group ofactivities has also been determined.

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Sample areas, activities and data collection: The nature of micro-investments out of microcredit is that they arenumerous and of similar types, involving more or less similar amount of money, and are spread over throughoutthe country. A total sample of 105 borrowers has been randomly selected from four major areas of concentration ofPKSF's POs. However, the final analysis was conducted for 84 borrowers. Sample activities have been taken fromfive broad categories: small trade, poultry and livestock, agro-processing, rural transports and services. Theanalysis requires information related to income and expenditure, and loan and equity for each micro-project. Asnormally microcredit borrowers do not keep records of transactions, estimates may contain over or understatementof financial figures because borrowers provide this information from their memory. Since loan disbursements andrepayment are made throughout the year, the annual income and expenditure cash flows of borrowers have beenprepared accordingly. An estimated cost of family labor has been deducted from revenues. The family laborcomponent is taken as income to the family while constructing cash flows for the family.

Impact on households: All 84 families included in the study have generated or are expected to generate surplus(receipts minus payments) during the year. This is considering the loan repayments already made to the PO andmicro-investment made during the year. Since the families will be generating surplus, it is expected that they willbe able to repay the remaining loan installments as well. Families spend on an average Tk. 21,751 asmicro-investment. The contribution of microcredit to family income has been found to be significant. On anaverage it contributes Tk.83,000 per year as additional income in the form of family labor and profit. Theproportion of contribution from microcredit to total family income is also very significant and has been found to besometimes as high as 98% (Table 1).

Table 1: Contribution of Microcredit on Family Income

Tailoring 2 37,195 96,351 20,396 56.6

Rickshaw/van 3 24,496 62,816 21,763 46.3

Scooter (motorized 3 1 68,245 109,900 12,988 36.3wheeler)

Paddy husking 3 30,442 86,619 56,844 80.2

Grocery shop 9 41,408 99,759 23,338 68.0

Small trading 24 32,027 80,287 28,825 69

Milch cow 6 20,028 41,457 6,064 31.3

Broiler/cattle fattening 7 33,826 124,268 11,820 34.1

Chick rearing/poultry 2 11,143 41,482 8,303 21.3

Fish farming 2 30,594 78,976 22,484 35.4

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Furniture making/ 6 37,989 87,690 35,653 58.7bamboo products/pottery

Handloom/embroidery 3 27,123 71,216 30,027 65.7

Restaurant/sweet shop 4 56,345 99,389 33,014 58

Veg./agro-processing/n 9 19,599 65,777 16,990 40.6ursery

Services (painter/ 3 28,784 99,028 53,200 98.4weldingshop/blacksmith

Total 84

Average 37,832.6 83,001 25,447

Annual return of microcredit investments: Average value of investment varied between Tk.6,000 and Tk.28,000(in one case Tk.80,000) and the equity contribution was about 58%. PKSF's average loan size was about Tk.8,400(Table 2). All microcredit investments studied have produced profits. The annual return varied between 36% to226%, which is expected in case of such family managed micro-investments. The overhead cost and hired labor inmost of these investments are zero, leading to a very high rate of return. It has been observed that activities withshort business cycles, where money could revolve over and over within the year (e.g. trading, grocery shops, andrestaurants) have very high retums in the short run. On the other hand, activities having long business cycles likepoultry, fish farming, and cattle fattening have relatively low annual return. Importantly, the annual return in allcases has been found tc be higher than the effective rate of interest on microcredit.

Table 2: Annual Return of Microcredit Investment

Type of activity Number Average Average Average Average net Totalof cases Equity PKSF Investment income Annual

(Tk.) Loan (Ti.) from IGA Return on(Tk.) Investment

(%)Tailoring 2 7,525 5,500 13,025 25,529 196Rickshaw/van 3 1,000 6,667 7,667 10,350 135Scooter (motorized 3 1 70,000 10,000 80,000 28,800 36wheeler)Paddy husking 3 2,000 9,000 11,000 45,650 415Grocery shop 9 19,611 8,556 28,166 46,192 164Small trading 24 12,104 8,792 21,250 39,950 188Milch cow 6 16,700 9,333 26,037 13,279 51Broiler/cattle fattening 7 32,757 11,000 43,757 27,829 63.6Chick rearing/poultry 2 1,750 5,000 6,750 7,560 112Fish farming 2 5,000 11,500 13,000 8,320 64

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Fumiture making/ bamboo 6 4,417 8,167 11,583 22,124 191products/potteryHandloom/embroidery 3 4,667 8,333 13,000 28,730 221Restaurant/sweet shop 4 9,000 10,250 19,250 32,148 167Veg/agro-processing/nursery 9 3,014 7,278 10,125 12,758 126Services (painter/welding 3 14,000 7,667 21,666 48,965 226shop/black smith) I ITotal 84 12,729 8,402 21,751 26,546

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle No. of Persons and Specialty Performanc in

(e.g. 2 Economists, I FMS, etc.) _ Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identification/Preparation2/95 4 EC, PFS, PO, FAD S S

Appraisal/Negotiation7/95 5 EC, PFS, PO, FAD S S11/95 3 EC, PFS, FAD S S

Supervision12/96 2 EC, PFS S S9/97 5 EC, FA, MS, CON S S4/98 3 EC, FA, CON S S7/98 5 EC, SS, MS, MCS, MC S S4/99 (MTR) 10 EC, PFS, FAD, FMS, SS, IS, S S

EA, PS, DB11/99 9 EC, FA, FMS, SS, PS, DB, CON S S7/00 4 EC, FA, FMS, DB S S4/01 7 EC, FA, FMS, SS, PE, PS, DB S S

ICR5/01 6 EC, FA, FMS, SS, PS, DB S S

Note: EC: Economist; FA: Financial Analyst; FAD: Financial Advisor; PFS: Principal Financial Specialist;FMS: Financial Management Specialist; MS: MIS Specialist; MC: MIS Consultant; SS: Social Scientist;;MCS: Microcredit Specialist; DB: Disbursement Officer; PS: Procurement Specialist PE: PovertyEconomist; IS: Institutional Specialist; EA: Environment Advisor; CON: Consultant

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation 45.4 207.57Appraisal/Negotiation 6.3 112.68Supervision 85.8 274.95ICR 13.2 26.30Total 150.7 621.50

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingO Macro policies O H OSUOM O N * NAE Sector Policies O H *SUOM O N O NAO Physical OH OSUOM *N ONAO Financial O H *SUOM O N O NA[ Institutional Development O H * SU O M 0 N 0 NAOI Environmental O H OSUOM O N * NA

SocialO Poverty Reduction O H * SU O M O N O NAa Gender O H *SUOM O N O NAE Other (Please specify) OH OSUOM O N * NA

0 Private sector development 0 H * SU O M 0 N 0 NA0 Public sector management 0 H O SU O M 0 N * NAO Other (Please specify) O H OSUOM O N * NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bankperformance Rating

El Lending OHS *S OU OHUO Supervision OHS OS OU OHUO Overall OHS OS O U O HU

62 Borrowerperformance Rating

O Preparation OHS Os O U O HUa Government implementation performance O HS O S 0 U 0 HUO Implementation agency performance OHS OS O U O HU

a Overall OHS OS O U O HU

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Annex 7. List of Supporting Documents

Report on Poverty Alleviation Microfinance Programme, M. Syeduzzaman, Coordinator of the GovernmentTask Force, Ministry of Finance, July 5, 1995.

Microfinance I: Poverty Alleviation Microfinance Project, Back to Office Reports, 1996-2001, SAR andDCA, August 14 & October 2, 1996 respectively.

Establishing an Appropriate Regulatory Frame-work and Institutions for Regulating MFIs Engaged inDeposit Taking/Lending, and Developing Financial, Institutional and Regulatory Measures to Assist MFIsin Becoming Formal Financial Institutions and Strengthening the Linkage of MFIs with the FormalFinancial Sector, prepared by the Development Planners & Consultant (DPC) for the Bangladesh Bank,January 1999.

Institutional Audit of the Palli Karma-Sahayak Foundation (PKSF), prepared by M. Syeduzzaman, et. al.January 1999.

Microfinance I: Mid Term Review (MTR) Report of the Poverty Alleviation Microfmance Project, April20, 1999.

A Study on the Sustainability of Partner Organizations of Palli Karma-Sahayak Foundation (PKSF), ABank financed study, conducted by Dewan Alamgir (consultant), Reazul Islam (Bank staff), et al., April1999.

A Study on the Impact of Microcredit on Borrowers of Partner Organization of PKSF, a Bank financedstudy, conducted by Dewan Alamgir (consultant), Reazul Islam (Bank staff), et al., April, 1999.

A Background Study of Microenterprise Development through Partner Organizations of PKSF, a Bankfinanced study, conducted by Dewan Alamgir (consultant), Reazul Islam (Bank staff), et. al, April, 1999.

A vision document "PKSF: 2010" (December 28, 1999) was prepared by PKSF and approved by itsGoverning Body on PKSF's future role in the microfinance sector, including its plans to attainsustainability for PKSF and POs. This vision document has been substantially used to prepare the project.Various documents, issue papers, project background papers, etc., prepared by PKSF during thePreparation and Pre-appraisal mission (April, 1999 to September, 2000).

Microfinance II. Limited Due Diligence of PKSF, A Bank financed study conducted by V. Barrios(consultant), S. Ahmad, M. Hoque and R. Islam (Bank staff), May 2000.

Microfinance II. Limited Due Diligence of Big Partner Organizations, ASA, PROSHIKA and BRAC, ABank financed study conducted by V. Barrios (consultant), S. Ahmad, M. Hoque and R. Islam (Bankstaff), May 2000.

Profitability Analysis of IGAs of Microcredit Borrowers of Partner Organizations of Palli Karma-SahayakFoundation (PKSF), prepared by Reazul Islam and Dewan Alamgir, July 2000.

Microfinance II: Second Poverty Alleviation Microfinance Project, Project Appraisal Document (PAD),December 14, 2000.

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Comparison of Microcredit Impact on Borrowers of PKSF's Partner Organizations, a Bank financed study,conducted by Reazul Islam (Bank staff), et. al, March 2001.

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Additional Annex 8. Comparison of Microcredit Impact on Borrowers of PKSF's PartnerOrganizations

Introduction:

1. In March 1999 the World Bank conducted a rapid assessment of the socio-economic impact of microcreditprogram on 675 PKSF borrowers. The same group of borrowers was studied after 2 years in March 2001 to assessthe changes in their socio-economic status. There were some dropout of members from the first group of 675borrowers. The second round of survey could reach only 549 borrowers. The main reasons for drop-out inmembership have been the following: (a) some members became self-reliant and decided to leave the creditprogram; (b) some members migrated from the village to other areas; (c) some members lost their membership,because they were irregular in making repayment; and (d) some members tried to access loans from manyNGOs/MFIs and, therefore, their memberships were canceled. The survey used same structured questionnaire tocollect the relevant data.

Objectives:

To undertake a comparative analysis of changes in the socio-economic indicator of the same group ofborrowers between March 1999 and March 2001,

Investment by the members:

2. The borrowers' capacity to use amount of loans has increased, together with POs capacity to handle morecredit funds for disbursement. At the beginning, the average amount of the first loan was Taka 2,188 and 61 % ofthe borrowers received up to Taka 2000 as their first loan. The average loan size was Taka 7,472 in 1999 and it hasincreased to TK. 9,298 in 2001, i.e. an increase by 24.4%. In 2001 more than 55% of borrowers received morethan Taka 8,000 per person compared to 30% in 1999.

3. There has been very little shift in the type of microcredit investments. The most common area of investmenthas been small business (petty trade and shops), about 34.81% borrowers invested in these activities in 1999 and32.42% in 2001. There has been substantial increase in the share of paddy husking activity, which increased from3.7% in 1999 to 21.49% in 2001. Milch cow and cattle fattening, and land leasing activities also significantlyincreased, sharing 18.76% and 10.93% of the total activities respectively. Diversification of activities by designinginnovative credit delivery systems will be crucial for sustainability of microcredit and to avoid saturation ofactivities.

Impact of microcredit:

4. The impact of microcredit has been assessed as follows: (a) to study the impact of microcredit, opinionsof borrowers were gathered regarding the benefits or contributions of microcredit on: (i) the income of the family,(ii) nutrition, clothes, housing conditions, and sanitation, and (iii) land ownership; (b) the borrowers were askedto categorize the conditions of current housing and that of before joining PO and the contribution of microcredit onthe housing improvement; (c) borrowers evaluated their overall current family status and compared that with thestatus before joining the PO; and (d) an attempt was made to estimate the value of assets formed by the borrowersafter joining the PO based on their opinions and compare that with their current debt to find their net worth.

Overall assessment of impact of the credit program:

5. Overall, socio-economic indicators to assess the impact on borrowers in 2001 showed better performancethan in 1999. A comparative assessment of impact of credit program by sample borrowers is as follows:

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* income increased in 1999 for 97.93% of borrowers and in 2001 for 98.72% of borrowers. Only 7 borrowers(1.28%) in 2001 reported same level of income and no one reported any decrease in income;

* quality and quantity of food intake by the family members improved for 88.59% of the borrowers in 1999 and98.72% of borrowers in 2001;

* clothing improved for 87.85% of borrowers in 1999 and for 98.91% of borrowers in 2001;* housing conditions improved for 75.26% of borrowers in 1999 and for 85.97% of borrowers in 2001;* child education improved for 75.41% of borrowers in 1999 and for 87.7% of borrowers in 2001;* sanitation conditions improved for 68.74% of borrowers in 1999 and for 83.24% of borrowers in 2001; and* quality of life improved for 94.96% of borrowers in 1999 and for 95.63% of borrowers in 2001.

Change in land ownership:

6. Increased land ownership in rural areas signifies improved economic conditions of a poor family. Theland ownership of borrowers increased from 28.44% in 1999 to 54.56% in 2001. The average land ownershipincreased to 44.64 decimals in 2001 compared to 30.56 decimals of land as reported in 1999, which is significantfor a poor family. Nationally, 55.23% of rural households own less than 49 decimal of land and 36.46% own landbetween 5-49 decimals [Household Expenditure Survey 1995-96 (Summary Report)].

Changes in housing conditions:7. A significant improvement in borrowers' housing quality has been reported between 1999 and 2001,compared to conditions before joining the POs. Housing conditions have been classified in 4 categories: (a)thatched houses (jhupri); (b) houses with wall and roof made of sub-standard materials; (c) houses where the wallis made of sub-standard material and the roof with Cl sheet; and (d) wall and roof both made of CI sheet.Ownership of category (a) houses was only 2% of the total in 2001 compared to 4.59% in 1999, while it was36.74% before joining the POs. Ownership of category (b) houses was 9.65% of the total in 2001 compared to15.11% in 1999. On a nationwide scale for rural areas, 75.2% households use jute/bamboo/mud (sub-standardmaterial) as wall material and 31.8% households use similar sub-standard material as roofing materials. However,in the case of borrowers, only 15.11% of households use such lower quality materials for roofs and walls. On theother hand, only 12.2% households for the natiion as a whole use tin as wall materials, whereas 36.0% ofborrowers use tin for walls and roofs, a significant improvement over the national characteristics (Demographicand Health Survey 1996-97). Thus, borrowers have better housing conditions than others in rural areas.

Self-evaluation of family conditions:

8. Microcredit interventions have been able to significantly reduce food deficit of the borrowers. The numberof families experiencing food deficits (and other incidental expenses) have been reduced from 82.22% to 9.63%over a period of 5 to 6 years. This was evaluated by seeking information on their family conditions based on six (6)categories: (a) Chronic deficits throughout the year; (b) occasional deficits; (c) no deficits; (d) adequate supply; (e)surplus to be used to pay for children education and other purposes, and (f) surplus to be used for investments. In1999 only 0.59% of borrowers reported that they experienced chronic deficits and 9.04% reported that theyexperienced occasional deficits during the year, which compares favorably with 3 8.07% and 44.15% andrespectively before joining the PO. Currently 77.33%of families of borrowers have either an 'adequate' or bettersituation [summation of categories of (d), (e) and (f)] compared to 4.75% before joining the PO. Category (f)shows dramatic improvement, reaching 36.0% in 1999 and 62.84% in 2001.

Services of POs

9. All members (100%) received credit. All POs provide basic orientation as a core activity before startingcredit. However, not all POs provide some services in particular skill training. Nevertheless, there have beenimprovements in this area: 42.62% in 2001 reported they received some kind of skill training compared to 32% in1999.

Microenterprise loans:

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10. The demand for microenterprise loans among the borrowers is widespread. Of the 549 borrowers, 88%asked for larger loans, of which 38.07% requested loans of more than Taka 20,000 to scale up their enterprises.

Conclusion:

11. The rapid impact survey is conclusive in suggesting that microcredit interventions have been able toimprove socio-economic standing of the borrowers. The comparative study shows consistent improvement almostin all significant indicators between the two periods. This can be supported by some comparison of nationalindicators to the indicators established by the study.

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