News from NECS

Years of work reap rewards

Fausto Jordán of ECLOF Ecuador reviews the achievements of the microfinance movement in his country over the past 30 years.

A national ECLOF committee in Ecuador, South America, was set up at the end of the 1970s at a time when the Agrarian Reform Process, begun by law in 1964, was still underway. Three decades ago in Ecuador, the struggle to gain access to land was a complex issue and one for which many landless peasants made great sacrifices.

Peasant groups also lacked access to many basic services despite people's demands for them to be supplied. It was a boom time for development non-governmental organizations (NGOs), who established themselves in the country and worked in rural areas, especially with poor peasant groups.

CESA

The Ecuadorian Agricultural Service Federation ( Central Ecuatoriana de Servicios Agrícolas - CESA) implemented the Agrarian Reform process and established new models to assist the peasant economies of the coastal and mountainous regions.

Within the framework of equality and transparency, CESA entered into alliances with public and private entities to supply irrigation infrastructure to areas that had considerable concentrations of peasants. The people needed water for cattle and crops, as well as for human consumption.

The federation also began to provide credit services through the use of a methodology different from the one employed by the commercial and state banking sectors. This move laid the foundations for the organization of Ecuador's indigenous peoples at a national level.

CESA received support for its credit venture from international sources of funding and later from national bodies.

It is the specialised approach and credit products that ECLOF Ecuador, like all NECs, offers to the rural poor that is attractive to those for whom ECLOF exists. There is mutual trust and professionalism between ECLOF and its clients, and the NEC supports enterprises that add value to agricultural and livestock production. We also encourage NGOs to support solutions for organizations of small-scale rural producers.

1990s

By the 1990s, the economy of Ecuador had become very dependent on the oil sector; investment opportunities were concentrated in the urban sector, with rural economies ignored. Conventional banks were not interested in small-scale producers because of the high risks inherent in the banks' archaic risk mitigation methods.

In 1994, we organised a workshop to analyse the intentions of the commercial banking sector towards peasant economies.

New methodologies

Those of us in the alternative financial sphere designed new methodologies based on an understanding of who people are rather than what they have. Methodologies have been developed for different niches. Peasant economies have diversified their activities and modified their cash flows in order to be less susceptible to risk if they apply the methodological approaches microfinance services offer. In the face of the synergy created by the informality, innovation and transparency that exists within micro-enterprises, some commercial banks are now making efforts to offer opportunities based on new financial products.

Over a period of six years, ECLOF Ecuador engaged in scores of conversations with formal and informal financial service providers. This enabled all concerned to learn about the programs and methods of each other.

New network

In 2000, and with ECLOF Ecuador's full support, the Rural Financial Network ( Red Financiera Rural - RFR) was created. Today, the network has 45 members who include commercial banks, microfinance institutions, NGOs, cooperatives, the National Women's Council ( Consejo Nacional de la Mujer - CONAMU) and the National Peasant Training Institute ( Instituto Nacional de Capacitación Campesina - INCCA).

RFR members come from all over the country, and, as of September 2003, represented approximately 344,000 clients with a combined portfolio of US$259 million. Client savings account for 56% of the total portfolio.

New ECLOF presidents

Dominican Republic

Meran Reynoso is the new president of ECLOF Dominicana. Meran has extensive experience with non-governmental organizations (NGO) and is currently the Executive Director of Casa Caribeña , which is a Dominican Republic microcredit institution with around 550 clients, and is supported by the Reformed Church in America.

ECLOF's new president is an accountant by profession and in the 1990s was the General Accountant of the Foundation against Hunger.

Among his many other commitments, Meran holds the presidency of the Evangelical Mennonite Churches in his country. He is also Secretary of the Board of the Social Services of the Dominican Churches, and Vice-President of the Board of the Manantial, Inc. Library

Brazil

Bishop Adriel de Souza Maia of the Methodist Church of Brazil has been appointed as the new President of ECLOF Brazil.

Bishop de Souza Maia is also President of the National Council of Christian Churches in Brazil, a member of the Board and Treasurer of the Ecumenical Coordination of Services (CESE), a Board member of World Vision in Brazil, and Vice-President of CEADe ( Centro de Apoio e Desenvolvimento - The Centre for Support and Development).

Speaking in February at the 20th Assembly of CEADe, which represents ECLOF in Brazil, Bishop de Souza Maia reaffirmed CEADe's aim to provide microcredit and to support grassroots people so that they can become "instruments of intervention" within their society.

Bishop de Souza Maia outlined a number of measures CEADe had taken to expand its lending portfolio. First results of this action were good and it was hoped that new partnerships would be established so that CEADe could offer more loans to help improve the quality of life in Brazil.

Commenting on the election last year of President Luiz Inácio Lula da Silva, the bishop said this had brought a significant degree of hope to many, although the government still had a long way to go to achieve the results it had promised by the end of 2004.

Archbishop visits ECLOF Cameroon

During a visit to his new archdiocese, His Grace Victor Tonye Bakot, the recently-appointed Roman Catholic Archbishop of Yaounde, made a call on ECLOF Cameroon.

The Catholic Church in Cameroon accommodates ECLOF in offices within the Church of Christ the King, in the parish of Tsinga in Yaounde The archbishop's visit to ECLOF reflected the warm relationships that exist between the parish priest and ECLOF staff and officers. The Catholic Church is an institutional member of ECLOF Cameroon.

Archbishop Tonye Bakot talked with the ECLOF Cameroon President, Alice Kengne Youmbi, and personnel, and blessed their offices. During his visit, the archbishop said that the Church is standing besides ECLOF in its fight to alleviate poverty and give people the possibility to improve their own lives through fair credit.

During a friendly exchange of courtesies and conversation, the representation of the Catholic Church within the National Committee of ECLOF Cameroon was highlighted.

The archbishop's visit ended with the sharing of the 'Kola', in which the President and the Director of ECLOF Cameroon took part. In this traditional ceremony, a kola nut is offered as a gesture of friendship and hospitality.

ECLOF Cameroon played an active part in the preparation for the visit of Archbishop Tonye Bakot, which everyone involved considered had been a great success.

Alice Kengne Youmbi, President of ECLOF Cameroon
and a member of the ECLOF International Board,
with Archbishop Tonye Bakot.

ECLOF and Oikocredit

Dr Francis Julian

Staff of ECLOF and its sister agency, Oikocredit must give practical meaning to the strategic alliance into which they entered at the end of 2001 ( New Horizons 26, p. 12).

Dr. Francis Julian, an advocate of the Supreme Court of India and a member of Oikocredit Board of Directors, made this call during the recent ECLOF EurAsia/Pacific workshop (see p. X) .

Current joint work between ECLOF and Oikocredit in Bolivia was an important step in the right direction, Dr Julian told workshop participants. He believed this kind of working should be expanded, and that exploring possibilities for joint action in areas such as capacity building would help realise the potential of the strategic alliance that now existed between ECLOF and Oikocredit. He urged field staff to visit each other and initiate discussions on how closer co-operation could be realised in individual country contexts.

? Talks are taking place in Brazil between ECLOF, Oikocredit and CEADe ( Centro Ecumenico de Apoio e Desenvolvimento - Ecumenical Centre for Support and Development) to explore how the three microfinance organizations can work together. Representatives of the three agencies recently paid a joint visit to a project financed by Oikocredit at the Community Hospital of the Methodist Church in Porto Alegre. It is now hoped that a partnership can be established between ECLOF, OIKOCREDIT and CEADe to support projects in Brazil of more than US$50,000. Work continues on the drawing up of an agreement.

ECLOF Zimbabwe elects new chairman

Zivaishe Zinyoro Ratisai, a financial and strategic planner, has taken over as the Chairman of ECLOF Zimbabwe. His election took place in October 2003.

Born in 1951, Mr Ratisai comes from the district of Mberengwa in Zimbabwe, where he is a member of the local Lutheran Church. From the University of Zimbabwe, he has gained an MBA and a B.Sc. degree in economics.

Zivaishe Ratisai has been a member of the ECLOF Zimbabwe Board since 1999. He represents the Lutheran Development Service on the Board, and is also the Chairman of the Lutheran Development Service, which is now registered as a non-governmental organization (NGO) in Zimbabwe.

Working professionally as a consultant in the areas of finance and economic planning and development, Mr Ratisai also holds directorships and is a shareholder in three companies.

Taking on the VAT man

Faced with a new and swingeing tax, microfinance institutions in Armenia banded together to change the law. Armenian ECLOF Director, Tigran Hovhannisyan, and Executive Committee member, Dr Alexander Poghossian, explain how victory was achieved.

Since gaining its independence in 1991, Armenia has made significant progress to becoming an effectively functioning market economy. In matters of tax reforms, the country now has a relatively low tax base, which is an additional incentive for business development. Efficient mechanisms for tax collection exist; among other benefits, this reduces the opportunities for tax avoidance and evasion.

However, much still needs to be done in the areas of taxation policy development and enforcement. One of the major problems is that tax-related laws are usually drawn up and adopted by the government with little or no consultation with the private and non-government sector. As a result, sometimes irrelevant, controversial or even senseless provisions appear in tax legislation, which are then very hard to amend or overturn.

One example was a new law on Value-Added Tax (VAT), the most important indirect tax levied on goods sold or services rendered in the country. Legislation passed in December 2002, said that all lending activities, unless executed by a bank or licensed financial institution, were liable for VAT at 20% .

Shock

This legal development came as a real shock to members of the microfinance community. Most are unlicensed financial institutions, which is sensible since they do not attract deposits from the public. MFIs faced the unenviable situation of either having to add 20% to their interest rates to cover VAT, or paying the tax out of their current income, and thus reducing their profits. The microfinance sector knew it could not bear the additional burden this latter course of action would bring. Besides, MFIs are classed along with commercial entities within the common tax framework and already pay a tax on profits!

So, the new requirement to pay another 20% as VAT took most MFIs aback. Any increase in interest rates would negatively affect poor borrowers, who are, of course, the main beneficiaries of MFIs. To reduce income, on the other hand, would jeopardise the sustainability of MFIs.

Working together

After their initial dismay, microfinance providers began to look for measures to remove the VAT requirement. This was done despite the fact that the products of most MFIs in the country overlap and, practically speaking, most MFIs are in competition with each other.

The VAT law was at the top of the agenda during the 2003 Microfinance Forum - an informal, regular gathering of most microfinance providers in the country. It should be mentioned that some microfinance projects, especially those financed by the United States Agency for International Development (USAID) and other international government-related programs, already had a way open for them to deal with the issue. By virtue of inter-governmental agreements that free implementing agencies (not only MFIs) from all taxes, these MFIs were exempt from paying VAT. However, this was no solution to the basic problem, and the VAT-exempt MFIs, together with organizations like Armenian ECLOF, continued joint efforts to push for the removal of the VAT provision. In the meantime, Armenian ECLOF, along with all similar MFIs in the country, had to pay the VAT and this put a great burden on the agency.

Other agencies supported MFIs in their efforts and experts at the Centre for Microfinance Development and Research (CMDR) - a non-government organization to provide economic, legal and technical support to the microfinance sector - joined the campaign.

In economic periodicals, as well as in business meetings with senior government officials responsible for tax policy development, CMDR pointed out the harm that the VAT provision inflicts on the borrowers with whom MFIs work. CMDR also pointed out that the law was fundamentally flawed: by definition, value-added tax must be levied on transactions that add economic value; lending does not do this! Therefore, the provision should be removed, not because other countries do not have it but because these countries do not have it since it makes no sense!

All these efforts eventually persuaded the Ministry of Finance and the Tax Inspectorate to delete the VAT clause from the law with effect from the beginning of 2004.

Armenian ECLOF had to pay, and therefore 'lost', around US$7,000 during the time VAT was levied. Nevertheless, the outcome of the coordinated challenge to the law is an excellent illustration of ways in which MFIs, even if they are competing for clients, can and should deal with serious and commons challenges together. When this happens, even governments take notice and can change their minds!

ECLOF official heads microfinance law review

John Banda, Director of ECLOF Zimbabwe, has been appointed to lead a national task force that will look at microfinance law in the country.

The task force will be made up of members from the Government and Parliament, as well as representatives from the Zimbabwe Association of Microfinance Institutions (ZAMFI).

This move follows a regional workshop in South Africa on "Regulation and supervision of microfinance institutions" in which Zimbabwean government and microfinance representatives took part, along with other Southern African Development Community (SADC) countries.

During exchanges at the workshop it emerged that SADC members were at various stages in terms of the regulation and supervision of the microfinance industry in their countries. The workshop called for the development of a framework for regulating and supervising the microfinance industry in all SADC countries.

To tackle this task, Zimbabwe subsequently resolved to set up its own national task force, made up of all relevant stakeholders.

Under the leadership of the ECLOF Zimbabwe Director, John Banda, the task force will consider all issues affecting microfinance institutions in Zimbabwe. Through its terms of reference, the task force will give special consideration to current law affecting money lending and rates of interest. It will also review existing legal instruments that relate to a borrower's fallback position in the event of default, including pledges and issues of security, collateral or otherwise.

Also on the task force's agenda will be the examination of current licensing rules and regulations, and the drawing up of proposals for the removal of regressive and retrogressive elements of existing laws.

The new body will review the registration requirements for microfinance institutions, and give special attention to initial capital limits in order to minimise the chances of widespread under-capitalisation and the resulting need to overprice products in order to make up for negative consequences.