08/08/06

PROMISING APPROACHES IN MF/MED SERVICES FOR VERY POOR PEOPLE

CASE STUDY

Nirdhan Utthan Bank, Nepal

Funded bySave the Children

Written byJohn Berry

June 2006

TABLE OF CONTENTS

Executive Summary..............................................................................................................i1. Context.........................................................................................................................1

1.1. Country Socioeconomic and Poverty Data..........................................................11.2. Local context – target area...................................................................................1

2. Organizational Framework..........................................................................................62.1. International Organization...................................................................................62.2. Local organization...............................................................................................7

3. Description of “Very Poor” Target Group.................................................................163.1. Individual and Household conditions................................................................163.2. Socioeconomic conditions.................................................................................17

4. Poverty Targeting and Assessment............................................................................194.1. Poverty targeting................................................................................................194.1. Poverty Assessment Data..................................................................................19

5. Products and Services................................................................................................225.1. Financial Products.............................................................................................225.2. Microenterprise Development Services.............................................................245.3. Non-financial Services.......................................................................................255.4. Design and Product Development:....................................................................255.5. Implementation Process.....................................................................................31

6. Results........................................................................................................................326.1. Method of measuring results:............................................................................326.2. Impact................................................................................................................336.3. Cost Effectiveness and Sustainability................................................................33

7. Conclusions................................................................................................................387.1. Challenges and Pitfalls/Lessons Learned..........................................................387.2..................................................................................................................................38

Appendices............................................................................................................................Appendix 1. Contacts and Sources of Information........................................................41Appendix 2. Socioeconomic and Poverty Indicators: definitions, explanations and sources...........................................................................................................................43

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Executive Summary

Save the Children and Nirdhan Utthan Bank have worked together since 1997 to increase access to financial services for poor women and other vulnerable groups in rural Nepal. With institutional capacity building and technical assistance from Save the Children, Nirdhan has successfully re-engineered its methodology and introduced flexible new products to reach those in remote areas with little or no assets. These innovations have driven Nirdhan’s growth from 3,000 clients to over 70,000 clients, making it Nepal’s leading women-focused microfinance institution.

Nirdhan Utthan Bank is headquartered in Bahairawa, with branch offices in ten districts in the southern lowland and central hilly areas of Nepal. Nirdhan was founded as an NGO in 1991 and began offering financial services in 1993. In 1998 Nirdhan Utthan Bank (“the bank for the uplifting of the poor”) was registered. A year later, Nirdhan Bank received a license from the Nepalese Central Bank and began operations as a microfinance bank.

Nirdhan’s mission is to offer financial services and to improve the social awareness of underserved poor people in Nepal. The leadership of the organization is fully committed to serving the poor through sustainable activities. Nirdhan’s Chief Executive Officer is a visionary former central banker who has been a major force in the development of the microfinance industry in Nepal. The General Manager is a pragmatic former commercial banker with a firm grasp on the finances of the organization. The work culture that pervades the organization is a reflection of this leadership. While serving the poor is the paramount value of Nirdhan’s organizational culture, there is an equally strong awareness that without a healthy loan portfolio that generates sufficient revenue to cover costs, Nirdhan will cease operations. New staff members are trained on these principles from their first days with the organization.

Nirdhan Bank targets the poor in underserved areas of Nepal. As of May 2006, Nirdhan serves 74,000 clients, including 58,000 borrowers. A recent external poverty impact study estimated that 37%, or approximately 27,000 of Nirdhan clients, are poor and 26%, or approximately 19,000 of Nirdhan clients, are very poor.

To ensure that its services are reaching the poor, Nirdhan has developed a number of poverty targeting methods. One very simple method of targeting the poor has been to open branch offices in areas where poverty is endemic. Poverty levels in Nepal are highest in the rural hills and mountains, where Nirdhan has recently opened several new branches. Once Nirdhan identifies a potential area for expansion, they implement a rapid rural appraisal survey and speak with local leaders to determine areas which could support a branch office. After choosing a new branch location, Nirdhan staff organize household surveys to identify potential clients. Once potential clients have been selected, Nirdhan’s main targeting tool is a means test which is implemented by loan officers at the household level and intended to select only those who qualify as poor to become group

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members. Another relatively simple method of targeting the very poor has been to work with socially marginalized women, such as untouchables and ex-bonded laborers. Although Nirdhan’s primary financial service methodology remains Grameen Bank group lending, they have recently experimented with modifications to increase its flexibility and to offer additional non-credit services. These have included the creation of self-reliance group village banks, changes to repayment schedules and terms, and offering individual and other specialized loans. Additional financial services offered by Nirdhan include life and livestock insurance and remittances. Nirdhan has also developed products for very poor clients which combine financial and non-financial services in order to first bring clients out of destitution and build their business and life skills, then offer them small loans for income generating activities.

In order to measure the impact of its programs over time, Nirdhan has periodically hired local consulting firms to assess changes in assets and empowerment among its clients. Indicators used in these assessments include economic assets, educational assets, social assets and health assets. Findings from a recent study indicate that Nirdhan has had an impact on a range of poverty indicators. For example, 30% of Nirdhan clients had increased their income and 30% also increased savings. Of all clients surveyed, 28% improved their nutritional status and 74% improved food security. Finally, 86% reported an increase in their empowerment to make decisions regarding loans and savings use.

In both absolute and relative terms, Nirdhan is a cost-effective and sustainable organization. Nirdhan’s efficiency is demonstrated by its operating expense to loan portfolio ratio of 13.5%, which compares favorably to the regional benchmark of 22%. In addition, Nirdhan’s cost per borrower is $15, with an average loan balance per borrower of $113. These figures also compare well to the Asian benchmark cost per borrower of $25. It is Nirdhan’s stated goal to cover costs, but not to maximize profits. The impact of this policy is demonstrated in Nirdhan’s sustainability ratios, which are 100.7% operational self-sufficiency and 100.6% financial sustainability. (Benchmark ratios for medium-sized Asian Micro Finance Institutions are 113% and 110% respectively.) One area for concern with Nirdhan’s portfolio is their very high portfolio at risk ratio, which as of June 2006 stood at 14.25%.

While there is room for debate regarding whether there is room for improvement in Nirdhan’s outreach to poor clients, this discussion must take into consideration the challenges of the context in which Nirdhan is working. Nepal is one of the poorest countries in the world, and Nirdhan has been serving poor clients in remote rural regions during an active political insurgency that has already killed 13,000 civilians. While this does not necessarily mean Nirdhan should be given leeway for basic issues such as their high portfolio at risk ratio, they should be given credit for overcoming fundamental challenges that have daunted less dedicated institutions. Through these challenges they have continued to actively target and serve poor women.

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1. Context

1.1. Country Socioeconomic and Poverty Data

Table 1Country Statistics

Country NepalCurrency Rupee

Amount YearPopulation (millions) 27.6 million 2005Population density per square kilometer 157.3/ha 2001Percentage urban / rural population 14%/86% 2001Inflation 4.3% 2004/05Nominal Exchange Rate (current, X Currency per US$1) 72.1 2006HDI value 0.526 2004HDI ranking 136 2003PPP Exchange rateGDP/Capita (PPP US$) $1,400 2005Population below national poverty line (%) 42% 2003Population living below $1 a day (%) 38% 2003Population living below $2 a day (%) 83% 2003Population growth rate 2.16% 2002Life expectancy 60 years 2002HIV prevalence (% ages 15-49) 0.3% 2003Malaria cases (per 100,000 people) 33 2000Population undernourished 17% 2002Children underweight 48% 2000

Adult literacy (male, female)Aver. 53%Male 65%

Female 43%2002

Net primary enrolment ratio (male, female)Male 79%

Female 64%2002

Net secondary enrolment ratio (male, female)Male 36%

Female 25%2002

Physicians per 100,000 people 5 2002Health expenditures per capita $65 2002Gender-related development index (GDI) rank 106 2002Gender-related development index (GDI) value 0.511 2002Sources: “Nepal Human Development Report 2004: Empowerment and Poverty Reduction” UNDP, Kathmandu, Nepal, 2005.“The CIA World Fact Book” CIA, Washington, DC, 2006.

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1.2. Local Context – Target Area

1.2.1. Briefly describe local socioeconomic conditions

1.2.1.1. Geographic reference of location and size of populationNepal is one of the poorest countries in the world, with 40% of its population living below the poverty line. Located in southern Asia, Nepal is landlocked and strategically wedged between two powerful neighbors, China and India. At close to 150,000 square kilometers, Nepal is slightly larger than the state of Arkansas. Geographically the country is divided into three distinct regions, the tarai flat plain of the Ganges River in south, the central hill region, and the rugged Himalayas in north. Mountains cover 75% of Nepal, which is home to 8 out of 10 of the world’s tallest mountains, including Mount Everest. The estimated population of Nepal in 2005 was more than 27.6 million, with a growth rate of 2.16% and a life expectancy of 60 years.

1.2.1.2. Local population characteristics (detailed information on target group to follow in later section):

1.2.1.2.1. Ethnic groupsNepal is home to over 100 ethnicities, speaking more than 12 languages and practicing 9 different religions. Major ethnic groups include: Chhettri 15.5%, Brahman-Hill 12.5%, Magar 7%, Tharu 6.6%, Tamang 5.5%, Newar 5.4%, Muslim 4.2%, Kami 3.9%, Yadav 3.9%, with other groups making up 35.5%. Major languages include: Nepali, Maithali, Bhojpuri, Tharu, Tamang, Newar, Magar and Awadhi.

1.2.1.2.2. Most important economic activitiesAgriculture is the dominant economic activity in Nepal, employing more than 80% of the population and counting for close to 40% of GDP. Because only 16% of land in Nepal is arable and because most agricultural labor is manual, production levels and efficiency in the sector are both low. Industrial production in Nepal mainly involves agro-processing of commodities such as jute, sugarcane, tobacco and grain. Tourism was formerly a major source of foreign exchange, but security concerns have led to a dramatic decrease in tourism revenues. With a per capita GNP (PPP) of $1,400, Nepal ranks 199th (out of 232 countries) in the world in relative economic prosperity.

1.2.1.2.3. Cultural and religious backgroundWhile Hindu culture and religion dominate Nepalese society (Hindus account for 80% of the population and, until April 2006, Nepal was the world’s only remaining Hindu monarchy), religious tolerance is the norm. In reality, many Nepalese practice a combination of Hinduism and Buddhism and Shamanism.

1.2.1.3. Natural resources, economic activities, markets, unemploymentThe Nepalese economy is dominated by services (41%) and agriculture (38%), with industry contributing 21%. Important industries include tourism, carpet, textile, small rice, jute, sugar, oilseed mills, cigarettes, cement and brick production. Nepal possesses abundant water resources, with strong potential for hydropower production. Although Nepal could be an important source of hydropower for its two larger neighbors,

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electricity supply in the country remains erratic and only 15% of the population has access to the power grid. Mineral resources include quartz, as well as small deposits of lignite, copper, cobalt, and iron ore. Although Nepal has significant timber resources, deforestation is a serious concern. Of the country’s 27 million people, 10 million are in the labor force, 42% of whom are unemployed.

1.2.1.4. For rural areas only: most important crops and livestock activities, water supply (irrigation, rain fed), seasons and number of harvests, land ownership and contract patterns

The most important crops in Nepal are rice, wheat, maize, potato, oilseeds, green vegetables and fruits. Water buffalo meat is also a significant agriculture product. Of 85,122 ha total agricultural land, 44,373 ha are under irrigation and the rest are rainfed. Rains fall mostly in June, July and August during the monsoon. Seasons vary from cool summers and severe winters in the mountainous north to subtropical summers and mild winters in the southern lowlands.

1.2.1.5. Occurrence of droughts, floods, natural disasters or conflictsNepal experiences occasional severe thunderstorms, flooding and landslides. The country also suffers from periodic droughts and famines. However, the most significant event to negatively affect the country has been the ongoing Maoist insurgency which has dramatically impacted the socio-economic conditions in Nepal on both the macro and micro level. The government has effectively lost control of large swaths of rural Nepal and the Maoists rebels have set up parallel administration and taxation systems in the areas under their control. Roadblocks and strikes have crippled the economy and military expenditures have drawn scarce resources away from development activities. Tragically, more than 13,000 people have lost their lives since the conflict began. Recent developments have offered a glimmer of hope that the insurgency will end, but until a long-term solution is found, the country will remain under its shadow.

1.2.2. Describe government policies aimed at the very poor:

1.2.2.1. Social protection schemes by the governmentThe Nepalese Government is implementing a four pillar poverty reduction strategy focused on broad-based economic growth, social services and economic infrastructure, social inclusion, and good governance. The framework for this strategy is founded on economic, political and socio-cultural empowerment.

1.2.2.2. Policies aimed to integrate the very poor, such as anti-discrimination and affirmative action laws

Nepal has developed national-level policies focused on empowering women, dalits (untouchables) and indigenous groups. The government has implemented several measures to promote gender equality including revising inheritance laws, affirmative action hiring and promoting women’s education and rights. The Nepalese Constitution of 1990 banned all forms of discrimination, while promoting the elimination of inequality, supporting diversity and advancing disadvantaged groups. In 2001 the government passed the Kamaiya Labor (Prohibition) Act which freed all bonded laborers and

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outlawed the practice. Despite the government’s good intentions, the commitment, resources and implementation of these policies remain weak.

1.2.2.3. Property and land rightsArticle 17 of the 1990 Nepal Constitution provides the right to all the Nepalese citizens to earn, use and buy or sell property. The Land Act of 1964 delineates the amount of property that any person or family may own by geographic regions. For example, up to 6.8 ha may be owned in the terai, up to 3.5 ha in the hilly regions and 1.25 ha in the Kathmandu valley. Over and above these amounts, small amounts of land may be owned for housing purposes.

Currently less than one percent of women in Nepal legally own homes, just over five percent own property and approximately 17% own other assets such as jewelry. Historically, Nepal's laws stated property could only be inherited through fathers (in case of children) or husbands (in case of married women). Intense pressure from women's groups eventually led to major changes in the country's inheritance laws. These amendments to the Civil Code recognized daughters’ rights to inheritance on par with those of sons as well as the rights of widows and women who are divorced (dhakal).

1.2.2.4. Local government and non-governmental development programsNumerous governmental and non-governmental programs are aimed at combating poverty in Nepal. Many of these programs are focused on remote rural areas, such as Western Nepal. Some of the governmental poverty alleviation programs include: the Western Terai Poverty Alleviation Program, the Western Upland Poverty Alleviation Program, Remote Area Development Programs, Local Development Funds and Village Development Programs. In addition, the government implements programs specifically focused on indigenous populations and disadvantaged groups such as ex-bonded laborers.

There are innumerable numbers of programs initiated by non-government organizations that support providing economic opportunities to poor including formation and strengthening of savings and credit groups, agriculture producer's groups, micro entrepreneur's and other economic groups in almost all the districts of Nepal.

1.2.3. Brief profile of microfinance environment.

1.2.3.1. List microfinance institutions and other financial institutions/services accessible by the poor.

The microfinance industry in Nepal is composed of more than 2,300 cooperatives, 47 registered NGO financial intermediaries and 22 development banks. In total, these institutions serve more than 700,000 clients with $62 million in loans outstanding. Data on the exact number of MFIs and clients served are hard to measure accurately because most MFIs are not registered and do not report to the Nepal Rastra Bank (Central Bank). A recent study by the MixMarket analyzed data from the eight largest registered MFIs

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(Chhimek Bikas Bank, Deprosc Development Bank, Madhyamanchal Grameen Bikas Bank, Nirdhan Utthan Bank, Chhimek Samaj Sewa Sanstha, Western Region Grameen Bikas Bank, Swabalamban Bikas Bank, VYCCU Savings and Credit Cooperative) and found them to be serving 158,124 borrowers with loans worth $17 million and 189,901 savers (2004 data). These eight MFIs represent one third of total microfinance loans in the country. Nirdhan, with more than 74,000 borrowers, is the largest MFI by far in Nepal and is currently serving over 10% of all the estimated MFI clients in the country.

1.2.3.2. Describe dominant microfinance models and servicesNepal has three major types of microfinance institutions (MFIs): cooperatives, financial NGOs (FINGOs) and development banks. Non-financial NGOs are also active in the creation of self-help group rotating credit and savings schemes, but they do not offer intermediate financial services. The cooperative model is the oldest in Nepal, dating from the mid 1950s. However, of the thousands of cooperatives operating in Nepal, only 20 are registered with the Rastra Bank. State-owned development banks became major actors in microfinance in the mid 1970s when the Rastra Bank directed them to invest 5% of their portfolio in small loans. The Rastra Bank continues to require all commercial banks to invest 3% of their total deposits in the deprived sector. This translates into an important source of debt finance for well-performing MFIs. MFIs in Nepal generally offer standardized loan products, with mandatory and voluntary savings. The Grameen bank model is predominant in Nepal, although self-help group lending and individual lending are increasingly common in remote rural areas.

1.2.3.3. Demand versus supply of microfinance servicesThe supply of microfinance services in Nepal is currently reaching an estimated 700,000 clients with $62 million in loans. The Asian Development Bank calculates that the effective demand for financial services in Nepal is 2.1 million households and roughly $140 million in loans. While demand outstrips supply by 2/3rds, institutional capacity remains a significant constraint to the growth of the industry. The presence of second story lending institutions such as the Rural Microfinance Development Centre, plus Rastra Bank requirements that commercial banks lend to the deprived sector, ensure that supply of capital is not a major constraint.

1.2.3.4. Breadth and depth of microfinance outreachMFIs are currently reaching an estimated 700,000 clients. Based on the 8 MFIs analyzed in the MixMarket study, growth in outreach to borrowers is around 7% per year and growth in outreach to savers is more than 11%. Depth of outreach as measured by average loan size ranges from a low of $90 to a high of $305. (These figures represent 35% and 117% of per capita GNI respectively.) Nirdhan’s average loan is $110, which is 42% of per capita GNI. Average savings balance among the 8 MFIs studied ranges between $3 and $206, with an average of $47 per saver. Nirdhan’s average savings balance is the lowest at $3.

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1.2.3.5. MF/MED initiatives (other than case study) aimed at the very poorInformal microfinance providers have existed for a long time in Nepal, but it was not until 1956 that cooperatives began to provide savings and microcredit services to their members. Recognizing the larger need for microfinance services, the government soon became actively involved in promoting the sector. In 1974, Nepal's central bank, Nepal Rastra Bank (NRB), directed the two state-owned commercial banks to invest at least five percent of their total deposits in small scale finance. The Agriculture Development Bank of Nepal (ADB/N) followed suit with the implementation of the Small Farmers Development Project, which was the first to introduce the concept of group guarantee as an alternative to physical collateral in Nepal. The number of microfinance institutions (MFIs) operating in the country increased dramatically during the 1990s with the involvement of thousands of local NGOs and the establishment of nine retail microfinance development banks (MFDBs).

It is estimated that over 2.1 million households in Nepal live near or below the poverty line and require microfinance services. Over the last decade, microfinance outreach has grown significantly to nearly 700,000 households (estimate from CMF's Directory of MFIs of Nepal) but continues to fall short of total demand. Estimates of household credit needs vary by region and depend on the local availability of economic opportunities. Overall, household microcredit demand averages $100. Hence, the effective unmet demand for such services is roughly $140 million.

1.2.4. Poverty

1.2.4.1. Geographic areas of the country where extreme poverty concentratedThe rural hill and mountain regions of Nepal suffer from a heavy concentration of poverty. Many of these areas are not accessible by road and have little or no infrastructure. Most of these areas are also under the control of Maoist rebels and therefore inaccessible to government relief and development programs. This combination of factors results in chronic food deficits in the hills and mountains. While extreme poverty has typically been a rural problem in Nepal, with the Maoist insurgency, many poor people have migrated to cities, thus compounding the problem of urban poverty.

1.2.4.2. Does the target area fall within these extreme poor regions?The majority of Nirdhan Bank’s clients live in the tarai lowlands of south central Nepal, a region which is relatively better off than the western hills or the mountains. However, Nirdhan has expanded its operations and developed specific poverty focused products for the rural hill regions of central Nepal. Nirdhan is currently limited by the Rastra Bank to operating in 10 regions. As soon as they receive authorization, they plan to expand their area of operations to include more rural hill regions.

1.2.4.3. How many people live in target area?Nirdhan Bank currently operates in ten districts with a total population of about 6,000,000 people.

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1.2.4.4. Proportion of population in the target area living below $1-a-day and/or within bottom 50% of people living below the national poverty line

Government data estimate that 38% of the population of Nepal is living on less than $1/day and 42% are below the national poverty line. A recent study by the Centre for Microfinance found that 26% of Nirdhan Bank’s clients are very poor, 37% are poor and 36% are middle poor.

2. Organizational Framework

2.1. International Organization

2.1.1. Name and type of the international organization Save the Children is a leading independent organization creating lasting change for children in need in the United States and around the world. For more than 70 years,Save the Children has been helping children survive and thrive by improving their health, education and economic opportunities and, in times of acute crisis, mobilizing rapid life-saving assistance to help children recover from the effects of war, conflict and natural disasters. Save the Children USA is a member of the International Save the Children Alliance, a global network of 27 independent Save the Children organizations working to ensure the well-being and protection of children in more than 110 countries

2.1.2. Organizational background

2.1.2.1. Mission and visionSave the Children believes in a self-help philosophy with a mission of providing communities with a hand up, not a handout. SC works with families to define and address the problems their children and communities face and utilizes a broad array of intervention strategies to ensure the sustainability and efficacy of all its programs. Programs seek to make lasting, positive change in institutions, behaviors or policies that affect human well-being. This is accomplished be enabling individuals, communities, and institutions to adopt new behaviors and systems that promote change and endure beyond Save the Children’s involvement. Save the Children recognizes, promotes and supports sustainability at four levels within its programs: institutional, financial, behavioral and policy.

2.1.2.2. Brief historyFounded by Eglantyne Jebb, Save the Children began assisting children in the United States in 1932 in the Appalachia Region. Today, Save the Children works in more than 40 countries, including the United States, and serves more than 33 million children and 32 million others. SC’s mission is to save and improve children’s lives, including parents, community members, local organizations and government agencies. 

2.1.2.3. Types of support

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Save the Children typically offers strategic, operational, and financial support to improve the institutional capacity of its local partners to help them better reach families and children.

2.1.3. Development intervention approachSave the Children operates both domestic and international programs focused on child welfare – including emergency response and long-term development. The program strategy is built around the principles of child-centeredness, empowerment, gender equity, sustainability and scaling up, and measurable impact. Programs are designed to increase the capacity of disadvantaged individuals and groups to make choices, and take actions on their own behalf with self-confidence, from a position of economic, political and social strength. Participation and empowerment are linked and mutually reinforcing. Programs in economic opportunities, education, health and humanitarian response address the rights of girls and boys as well as their physical, intellectual, social and emotional needs.

2.1.3.1. Primary target group and development sectorSC’s primary target group is children, their families and their communities. SC works in a range of development sectors, including health, education, HIV/AIDS, emergency response and food security, in addition to providing economic opportunities.

2.1.3.2. Specialized in MF/MED or multi-sectoralSave the Children supports both specialized and multi-sectoral partner institutions. SC and its partners implement best practice microfinance programs and strive for full financial sustainability within seven years.

2.1.3.3. MF/MED modelSC’s model is to improve the economic security of needy children and their mothers by building sustainable MFIs that provide access to financial services for poor female entrepreneurs. Where credible local partners exist, SC works with them to build their capacity both technically and institutionally. In countries where there is no credible MFI partner, SC facilitates the creation of one, usually transferring staff to the newly created institution after several years of direct management. Although Save the Children uses Group Guaranteed Lending and Savings (GGLS), or poverty lending, as its primary methodology, it works with partners who use a variety of methodologies, such as Grameen replicas and village banks. Most SC partner MFIs serve a client base that is 100% women.

2.1.3.4. Other sectorsSave’s multi-sectoral programming focuses on economic opportunities, primary, basic and adolescent education, emergency relief including disaster response and hunger and malnutrition, health with a special global program focused on Saving Newborn Lives, funded by the Bill and Melinda Gates Foundation and HIV/AIDS.

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2.2. Local Organization

Table 2Institutional Background

Issues ObservationsName of the organization or institution Nirdhan Utthan Bank Ltd. Geographic area of operation Ten districts (out of 75): Rautahat, Bara,

Parsa, Chitawan, Nawalparasi, Rupandehi, Palpa, Kapilbastu, Dang and Banke

Legal structure Public Limited CompanyRegistration status Licensed to operate as per Bank and Financial

Institution Ordinance Act 2006Regulation status Class D financial institution licensed by

Central Bank of NepalDate established Nirdhan NGO was created in 1991

Nirdhan Utthan Bank was created in 1998Specialized MF or multisectoral Specialized microfinance servicesStart of MF activities March 1993Core business Savings, Loans, Insurance and Money

TransferBusiness model Microfinance services through Grameen style

group lending and village banksTarget market 40% of the bottom poorNumber of clients 74,731 (As of June 2006)Number of staff 276 (As of Mid June 2006)

2.2.1. Organizational development

2.2.1.1. Mission and visionNirdhan Bank’s vision is to reduce poverty in Nepal by enabling poor people to contribute equally to a prosperous, self-reliant rural society through self-employment and social awareness. The bank’s mission is to extend financial services and to improve the social awareness of the poor.

2.2.1.2. Brief historyIn April 1991, Nirdhan was founded and registered with the Government of Nepal as an NGO. ("Nirdhan" means the poor in Nepali.) Two years later, in March 1993, Nirdhan started its microfinance operations near Bhairawa in southern Nepal near the border with India. Recognizing the limitations of offering financial services as a bank NGO, in November 1998 registered a separate company – Nirdhan Utthan Bank Limited (NUBL). In April 1999, Nirdhan Bank received a license from Central Bank as a “Class D Microfinance Bank” under Development Bank Act of 1996. In July 1999, all microfinance assets, liabilities, operations and staff were transferred from Nirdhan NGO to Nirdhan Utthan Bank.

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2.2.1.3. ObjectivesNirdhan Bank’s goals are to reach a maximum number of poor households, to develop a well-managed institution and to enhance women's self-respect. Their objectives are: to focus on bottom 40 percent of population, to maintain simple loan process, to require compulsory group training and savings, to seek homogeneity of group members, to promote collective group liability and to integrate financial and non-financial services.

2.2.1.4. Organizational culture, leadership, innovationNirdhan’s institutional culture and management are focused on serving the poor. New loan officers and staff are trained in Nirdhan’s pro-poor approach from their first days as interns. The leadership of Nirdhan on both management and board levels speak with one voice in their views regarding Nirdhan’s calling to serve the poor (although there is good natured debate about how to best serve the poor sustainably). Nirdhan’s founder, Dr. Harihar Dev Pant, has infused the organization with his vision of poverty reduction and empowerment. At the same time, Dr. Pant has entrusted day to day management of Nirdhan to a highly professional team of financial managers who keep a close eye on the bottom line. Nirdhan has been innovative in its efforts to serve the poor sustainably by dividing responsibilities between Nirdhan Bank, which offers market rate financial services, and Nirdhan NGO, which delivers social and training services that would not otherwise be profitable for the Bank to offer.

2.2.1.5. Organizational structure, roles and responsibilitiesBased on Grameen methodology, Nirdhan Bank organizes its clients into groups of five members. Nirdhan’s smallest operating unit is a loan center, which includes between eight and ten borrower groups (forty to fifty clients). Loan centers are grouped into branches. A typical branch office consists of one branch manager, one accountant and five to seven loan officers. Branches are organized by areas, with area offices supervising between seven and fifteen branches. An area office has one area manager, one program officer and two assistants. Nirdhan Bank’s management operates from its headquarters office in is Bhairawa. Of Nirdhan’s 276 staff members, 237 work at the branch level, 14 at the area office level and 25 at headquarters. Loan officers represent 166, or 60% of total staff. The General Manager is based in Bhairawa and is responsible for day to day operations. The unpaid CEO and founder is based in Kathmandu and is responsible for guiding the organization.

Chart 1Organizational Chart

Company Secretary

7 Branches

General Manager

Board of Directors

Chief Executive Officer

Training Dept.

Admin. Dept.

Accounts Dept.

13 Branches 15 Branches

Internal Audit Dept.

Kalaiya Area OfficeBharatpur Area OfficeBhairahawa Area Office

Planning & MonitoringBO

Dept

Bankeoffice

7 Branches10

2.2.1.6. General qualifications of staff Nirdhan’s staff are generally young, but qualified for their positions. Minimum educational qualifications for a Field Assistant (loan officer) are completion of 10 years of schooling with a certificate. Prior work experience is preferred, but not required. The minimum qualifications for a branch or area manager are a master’s degree and job experience. All new staff must be between 18-35 years old for men and 18-40 years old for women. Local languages skills are preferred and Nirdhan often hires staff from the communities in which they operate. Women and minorities are encouraged to apply.

In order to become a full time Nirdhan staff person, candidates must pass an extensive written exam, after which they are selected for an in person interview. Successful candidates must then complete a six month internship and training program before being hired. Nirdhan has recently developed an affirmative action program for women and ethnic minorities. Although all job candidates must successfully pass the written exam, women and minorities are given special consideration in being selected for competitive interviews. Currently 29 staff members, or 12%, are women.

2.2.1.7. Training/sensitization related to poverty outreachStaff training at Nirdhan is centralized in the headquarters-level training department. Having passed through the examination and interview process, recruits spend a week at headquarters for an introduction to the bank and its operations. They are then posted to a branch office for six months of on-the-job training. Recruits are partnered with senior field assistants who guide and monitor them closely. After six months, trainees are either let go or are promoted to the status of full-time staff. Although the focus of training for field assistants is practical, there is also important classroom based training on the Nirdhan lending methodology, policies, and procedures. During these training sessions new staff are introduced to the goals and mission of Nirdhan and are sensitized to the importance of serving poor clients.

Nirdhan managers are usually hired from within, so they have already been trained on Nirdhan’s poverty mission and are experienced in the bank’s operations. Additional training for managers is provided through regional workshops and seminars organized by Grameen Trust, CASHPOR and other group lending institutions.

2.2.1.8. GovernanceGovernance and oversight of Nirdhan’s management is assured by a nine member board of directors which meets at least twelve times a year. All of the board members are financial professions and prominent members of the banking and development communities. Most board members are representatives of shareholder banks. The board makes policy-level decisions regarding issues such as annual budgets, fund raising, setting interest rates and approving new products and programs. While the founder of Nirdhan, Dr. Pant, sits on the board and acts as CEO of the bank, he is not the board chair and defers leadership of the board to the Chairman and day-to-day management of the bank to the General Manager.

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Table 3Nirdhan Bank Shareholders

(as of April 2006)Nirdhan NGO 25.49%Public shareholders, including staff 19.02%Himalayan Bank Limited 12.24%Nabil Bank Limited 12.24%Everest Bank Limited 12.24%Grameen Trust, Bangladesh 11.22%Private sector individuals 7.55%

2.2.2. MF and MED services

2.2.2.1. MF model and products/servicesNirdhan uses three financial services models: group lending and savings (individual loans with solidarity group guarantee), village bank lending and savings (self-reliance group) and individual lending and savings. Nirdhan offers a wide range of loan products including general loans, agricultural loans, business loans, tube well loans, sanitary loans, housing loans and microenterprise loans. Maximum loan size for these different products ranges from $43 for an agricultural loan to $1,430 for an individual loan. Average loan size across the portfolio is $110.

Table 4Principal Loan Characteristics

Group lending

Group Size 5 members per group; one center consists of 8-10 groups

Loan Size First cycle loan starts at $70-$155 and increases by $70 in each subsequent cycle; maximum group loan $430

Loan Terms 50 weeks/25 fortnights; equal weekly/fortnightly installments

Interest rate 18-20% declining (15% for self-reliance groups); late penalty 2%

Collateral Group guarantee

Individual lending

Target clients Graduates of solidarity groups

Loan Size Minimum loan $430 and maximum $1,430

Interest rate 18% declining; late penalty 2%

Collateral At least 2 times of requested loan amount

For group loans, each of the five group members is collectively responsible for the payments of all members. Borrower groups comprise five members and one center is composed of eight to ten groups. When receiving the loans, group members come to

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Nirdhan's branch office and collect their cash individually, while repayments are made in fortnightly meetings in village centers.

Self-reliance group (SRG) loans are a recent product targeted at remote rural borrowers. SRGs are composed of an average of 30 women, who operate as an autonomous village bank, setting their own lending and savings terms and conditions. A four person executive committee is responsible for approving loans and collecting repayments. Nirdhan offers wholesale loans to village bank at 15% and SRG members set their own interest rate, which, in many cases is significantly higher than the interest Nirdhan Bank charges to the group. The margin between Nirdhan’s interest rate and the rate members charge themselves is accumulated in the group savings account.

In response to client demand, Nirdhan introduced an individual loan product in 2000. Individual loans are collateral based and the maximum size for this loan is $ 1,430. Loan term varies from one year to 3 years depending upon the nature of enterprise. Following growing problems with repayment and changes in Rastra Bank regulations limiting individual loans to former group loan borrowers, Nirdhan has deemphasized individual loans.

Nirdhan offers both mandatory and voluntary savings. Mandatory savings are collected from group members by deducting 5% of the loan amount up-front on selected loan products and collecting $ 0.03 per meeting per client. The mandatory savings is managed as a group savings fund, and members can take loans for emergency and consumption purposes from this fund. The voluntary savings product is a self-managed personal saving program and funds can be withdrawn at will. In order to encourage members to save, Nirdhan accepts deposits as low as $ 0.15. Average savings balance is $3 per saver.

In addition to the financial services above, Nirdhan also offers insurance and money transfer services. Insurance services are provided through a linkage with the National Life and General Insurance Company and include livestock insurance and life insurance. Money transfer services are offered in coordination with Nepal Investment Bank and Nabil Bank.

2.2.2.2. Description of main target group Nirdhan’s main target group is poor entrepreneurs in underserved areas of Nepal. All of Nirdhan’s clients are women and are typically among the poorest women in the villages that the bank serves. The bank’s strategy is to recruit first time clients among the 38% of the population who are below the poverty line. The vast majority of its clients are unable to read or write and many work as agricultural field laborers. Average land holding among its client is 0.3 hectares. The main economic activities of Nirdhan’s clients are livestock, gardening, petty trading and food processing.

2.2.2.3. Selection and/or eligibility criteria and methodNirdhan uses a set of simple means testing criteria to select poor clients and to measure changes in poverty among repeat borrowers. Loan officers visit each potential client before they receive a loan and fill in a 6 page questionnaire regarding their household and

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income. When processing applications for repeat loans, loan officers fill in an abbreviated 2 page questionnaire.

Table 5Nirdhan Bank Client Selection Criteria

Irrigated land holding of less than 7.5 Kattha (0.25 Ha.) per household of five family members

Non-irrigated land holding of less than 15 Kattha (0.5 Ha.) per household of five family members

No member of the family employed permanently in the formal sector Currently not borrowing money from any other organized financial service provider Per capita income of less than $65 No pucca (cement fixed and concrete ceiling) house at the time of joining the bank Permanently living in the area covered by the bank

2.2.2.4. Use of poverty assessment tool? Which method?Nirdhan uses several methods to assess the poverty of its clients. Their principle method is a linked system of client surveys, means tests and client monitoring. Information gathered by loan officers is fed into a Client Data Monitoring System. The client survey collects information regarding a potential client’s living standard, type of house, land ownership, earnings, employment and loan history. The means test form collects similar information, but is more comprehensive and more detailed. Additional data include the family history of the client, the educational status of their children, land ownership, food sufficiency, employment status, annual earnings of the family, type of house the client lives in, type of roof of the house, source of drinking water, latrine, household goods, electricity and water access, kitchen gardening, cattle farming and loan history. Client monitoring forms contain the same basic information regarding client economic status and are completed at the beginning of each new loan cycle. This combination of assessment tools helps Nirdhan to select poor clients and to monitor their changes in socio-economic status.

Nirdhan occasionally uses other more comprehensive tools for measuring poverty outreach such as in depth impact poverty impact assessments implemented by outside consulting firms. Nirdhan has funded these assessments an average of every 5 years, with an initial poverty assessment study implemented in 1996 and follow up studies in 2001 and 2006. Although these types of studies are too expensive to implement more frequently, they offer a valuable periodic reality check regarding Nirdhan’s progress in reaching the poor.

2.2.2.5. Job description of loan officer who interact with program participants related to financial services

Field Agents (loan officers) are Nirdhan’s primary interface with its clients. It is the Field Agent’s first responsibility to identify potential clients using means test form which

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assesses housing condition, land holdings, etc. Once the Field Agent has identified a critical mass of clients in a community, they act as facilitator to form groups of potential clients. They are then responsible for providing group training which includes orientation to bank policies, procedures, roles and responsibilities. Because all clients are required to sign their names on their loan form (rather than using their thumb print) loan officers must often and teach clients how to sign their names for the first time.

Once a group has gone through six months of training and compulsory savings, it is the Field Agent’s job to decide whether to recommend the group to their branch manager for recognition. After the group is recognized, the loan officer recommends each loan for approval. A month after clients have received their loans, it is the loan officer responsibility to perform a loan utilization check at the client’s home. Between loan cycles the loan officer also collects client monitoring information. During the loan cycle, Field Agents conduct group meetings every two weeks, collecting and documenting savings and loan payments and delivering the Information, Education and Communication (IEC) training. Group meetings also offer loan officers the opportunity to solicit feedback on Bank's product and services.

2.2.2.6. Staff incentive schemesNirdhan recently developed a quarterly staff incentive scheme which rewards loan officers based on the growth and health of their loan portfolio. Under this system portfolio at risk is the most heavily weighted of the incentive criteria and top performing loan officers can receive an increase of up to 20% over their base salary. Performance requirements and incentives are detailed in the table below.

Table 6Individual Quarterly Incentive Scheme

Criteria Minimum Requiremen

t

D C B A

 Portfolio at risk < 5% < 4% < 3% < 2% < 1%  

% increase over salary 2.5% 5.0% 7.5% 10.0%  

New clients 0 1 to 5 6 to 10 11 to 15 > 16  % increase over salary 1.25% 2.50% 3.75% 5.00%  

Existing clients 50

100

251 to 300

375 - 425

301 to 350

426 - 475

351 to 400

476 – 525

> 400

> 525

weekly

fortnightly% increase over salary 1.25% 2.50% 3.75% 5.00%  

Outstanding portfolio $3,571 $21,428 to $24,285

$24,285 to $27,142

$27,142 to $30,000 >$30,000  

% increase over salary 1.25% 2.50% 3.75% 5.00%  

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2.2.3. ResourcesNirdhan maintains a health balance sheet and careful manages its assets and liabilities, income and expenditures in order to ensure that the bank remains sustainable. As of December 2005, Nirdhan owned $10.3 million in assets, of which $6.5 million was in loans outstanding. They owed $9.6 million in liabilities, of which $1.9 million were client deposits. Finally, Nirdhan had $656,000 in total equity, of which $379,000 was in paid-in capital (a 171% increase over 2004). From a total financial revenue of $665,000, Nirdhan posted a net income of $79,700.

2.2.4. External assistanceNirdhan has received external support from both donors and commercial investors. Donor support has come in the form of technical assistance, training, office equipment and management systems, vehicles and lending capital. Nirdhan sources most of its lending capital from commercial banks. Historically, Nirdhan has leveraged more than three times more funds through commercial loans than donor grants.

Table 7Nirdhan Debt and Donated Funding Sources

Source Amount in USD TermsLoans

NIC Bank $214,286 4%Everest Bank $578,571 4%Nabil bank $2,208,554 4%Nepal Investment Bank $364,286 4%Himalayan Bank $1,893,571 4%Machhapuchhre bank $285,714 4%Central Bank $139,011 4%RMDC $1,014,286 5%Total loans $6,698,280  

GrantsCGAP $1,300,000 GrantPlan $122,596 GrantSC/USAID $514,701 GrantIRIS/USAID $48,536 GrantILO $59,020 GrantTotal grants $2,044,853  

2.2.5. RelationshipsNirdhan has long standing relations with Save the Children and Plan International and both Save and Plan have provided resident technical advisors to Nirdhan. The CEO of Nirdhan is an active member of Save the Children’s microfinance network. Nirdhan is currently promoting the creation of a Nepalese association of microfinance development banks.

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3. Description of “Very Poor” Target Group

3.1. Individual and Household Conditions

3.1.1. GenderAll of Nirdhan’s clients are women.

3.1.2. AgeThe minimum age for a Nirdhan client is 18 and the maximum is 64. The average age for all clients is 35.

3.1.3. Disability and chronic diseaseNepal has a high level of endemic communicable diseases, the most important ones being Malaria, TB, Kala-azar, Japanese Encephalitis and Filariasis. HIV/AIDS has substantially contributed to the increase of this burden, with an HIV prevalence rate of 0.3%. In addition to disease, lack of adequate health care facilities means that life events such as pregnancy can become serious health issues. For example, only a third of pregnant women are attended by trained personnel during pregnancy and less than 15% of deliveries are attended by trained health personnel. This means that 85% of Nepalese women go through delivery at home without any form of trained assistance.

3.1.4. Culture or religionThe great majority of the population in the districts where Nirdhan operates is Hindu (90%), with a significant Muslims minority (8%) and a small number of Buddhists (1.5%). Other religions represent less than 1% of the population.

3.1.5. EthnicityEthnic groups living in the districts served by Nirdhan include Newar, Gurung, and Thakali. Among Nirdhan clients, 50% speak Bhojpuri, 37% people speak Nepali, 4% speak Tharu, 1% speak Newari and 7% speak other languages.

3.1.6. Membership to socioeconomic groups, such as caste and classNirdhan’s targeting criteria focus on the 40% poorest clients. Nirdhan does not discriminate with regards to caste and class, and promotes inclusion of groups such as the dalit untouchables. In recognition of the difficulties faced by groups such as kamaiya ex-bonded laborers, Nirdhan has developed specific products integrating training, social outreach and financial services.

3.1.7. Household type, composition, marital statusClient selection criteria focus on women living in traditional houses without cement floors or tin roofs. In rural areas only 60% of households have access to running water and only 20% have latrines. Almost none of Nirdhan’s clients them have access to modern conveniences. The average household size for Nirdhan clients is 6.4 persons and very few households (5%) are headed by women. Nirdhan works exclusively with married women.

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3.1.8. LiteracyOverall literacy rates in Nepal are 40%, while the literacy rate for women drop to 25%. The vast majority of Nirdhan clients are illiterate. Among self-reliance groups, often only the members of the executive committee are able to read and write.

3.1.9. Education Among Nirdhan clients, 71% of their children between 6-10 years old are enrolled in school. However, girls comprise only 43% of primary school enrollment among clients. (Nationally 46% of primary school students are girls.) At the secondary school level, 30% of clients’ children attend school; 48% of school-going children are girls. Among the Nepalese population in general, an average of only 18% completed primary school and 13% completed secondary school.

3.1.10. Economic or political instabilityFor the last 10 years Nepal has suffered from political instability and economic stagnation. Maoist rebels have successfully taken control of most of rural Nepal, and the government has been unable to restore its authority. The increasingly unpopular King of Nepal dissolved parliament in 2004, which eventually led to a series of mass protests which forced him to give up control of the government in April 2006. A recently announced decision by the Maoist rebels to join parliament has given many hope that the political situation will stabilize, allowing the country to refocus on economic and social development.

3.2. Socioeconomic conditions

3.2.1. Refugee or IDP statusIn the 10 years since the beginning of the Maoist rebellion, many farmers have fled instability in rural areas for the protection of the cities. These internally displaced people have created informal settlements on the edges of urban areas where conditions are unhealthy and poverty is chronic. In addition, in order to avoid being drafted into the conflict by one side or the other, many young men have left the country to seek employment abroad.

3.2.2. Natural disasters: type, frequency, effectWhile Nepal experiences occasional severe flooding and landslides, the areas where Nirdhan operates are not prone to natural disaster.

3.2.3. Economic conditions

3.2.3.1. Employment levelsUnemployment in Nepal is currently 42%. More than 80% of Nepal’s workforce is involved in agriculture.

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3.2.3.2. Income SourcesPoverty levels in Nepal are higher among people dependent on agricultural income than on income from services. Most Nirdhan clients (61%) are dependent on income from agriculture. For the majority of women (64%) agriculture is their only source of income. Livestock and petty commerce represent alternative income sources for many Nirdhan clients.

3.2.3.3. Land ownershipLand is a major asset in Nepal and land ownership is the major aspiration for most rural Nepalese. However, among Nirdhan clients 95% own less than 0.5 ha and 4% are landless. The average client landholding is 0.3 ha. It is important to note that only 6% of all landholdings are owned by women.

3.2.3.4. Asset ownershipA recent survey of asset ownership among Nirdhan members found that on average of 58% of clients own a radio and 63% own furniture. However only 26% of clients own a bedset, 17% own a refrigerator and 3% own a bicycle. Additionally, 4% of clients own motorcycles and 1% own vehicles.

3.2.3.5. Income levelPoverty levels in Nepal are significantly higher in the hilly and mountainous rural areas where Nirdhan operates (47%) compared with urban areas (18%). Among Nirdhan clients, a recent study found that 26% are very poor, 37% are poor and 36% are middle poor. However, these average figures mask important differences in poverty by district. For example, 50% of clients in the Bara district are very poor, while 4.9% in the Rupandehi district are very poor and 51.8% are middle poor.

3.2.4. Geographic conditions

3.2.4.1. Rural/urban, remotenessNirdhan works in 10 districts out of 75 districts in Nepal. Of the districts where Nirdhan operates nine are in tarai plain region and one in the hilly region of Palpa. Nirdhan's headquarter is in the tarai at Bahairawa in the Rupandehi district. With a total population of 710,000, it is the most densely populated and wealthiest district in which Nirdhan works. (Population density in the district is 506/people per square kilometer.) In contrast, the population of the Palpa hilly district is 284,918 people, with a population density of just 209/people per square kilometer.

3.2.4.2. Access to marketsIn the taria plains rural areas, weekly markets are usually found within 2 to 5 kilometers of client centers. In hilly areas markets are fewer and further between, often 10 kilometers or more from client centers. For items other than daily necessities, clients in rural hilly areas often have to travel up to 20 kilometers.

3.2.4.3. Access to banks

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Due to Maoists insurgency, most commercial financial service providers have effectively abandoned rural areas and relocated to urban ones. Since more than 80% of the population of Nepal lives in rural areas, this trend has severely constrained already limited access to commercial banking services. However, for those living in the tarai plains, microfinance services remain relatively accessible and as there is usually an MFI within 2 to 15 kilometers of most villages.

3.2.4.4. Access to doctors and clinicsAccess to health care in Nepal remains extremely poor. The Government of Nepal has established a sub-health post for every Village Development Committee, which means that a very basic level of health care is usually available within 15 kilometers of any village. While there are more than 3,000 sub-health posts, 700 health posts and 180 primary health clinics, only 40% of these facilities have essential drugs available. In case of serious health issues, secondary and tertiary care are only available in district capitals, which can easily be 25 kilometers or more for a village center. In terms of human and physical resources, Nepal has 1 doctor for every 18,400 people, 1 nurse for every 3,700 people and 1 hospital bed for every 3,500 people.

3.2.5. Major vulnerabilities and risks encountered by target group. What are common coping mechanisms and how do these related to services/products offered by the organization?

Major risks encountered by Nirdhan clients include food insecurity, health shocks, loss of livestock and political risks. Among Nirdhan clients, 20% reported that they did not have enough food to eat at least one day per month during the past year. Only 32% of clients reported having personal savings available for emergencies. In order to cope with some of these risks, Nirdhan offers an emergency loan product, savings services, and livestock and life insurance.

4. Poverty Targeting and Assessment

As a general poverty targeting method, Nirdhan operates in some of the poorest districts in Nepal, which is among the poorest countries in the world. Another general targeting method is pro-poor product development, which makes Nirdhan’s financial products both useful to the poor and unattractive to the non-poor. Loan officer training and orientation are also used to reinforce Nirdhan’s poverty focus.

4.1. Poverty Assessment

4.1.1. Definition of “very poor” clients used by local organization

4.1.1.1. How does the organization label its “very poor” clients? Nirdhan’s primary tool for evaluating the relative poverty of its clients is its means testing survey. This includes an assessment of landholdings, employment, income and housing quality. Landholdings are the acid test for relative poverty, with clients owning between 0 and 0.16 ha of land classified as ultra poor, 0.2 and 0.33 ha of land

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classified as very poor and 0.36 – 0.5 ha of land classified as poor. Clients owning more than 0.5 ha are classified as non-poor.

4.1.1.2. How many clients labeled as “very poor” entered the program during the last 12 months? What percentage is this of total number of new clients recruited during same period?

According to a recent external impact assessment, 157 out of 480 new clients waiting for a loan are classified as very poor. This amounts to 26% of new clients. Among clients who have been with Nirdhan for five or more years, 25% are classified as very poor.

4.1.1.3. What type of poverty-related client data are collected when new client/participant enters the program?

Nirdhan gathers a comprehensive set of poverty data for each new client which is entered into their Client Data Monitoring System. A means test survey collects information regarding family history, educational status, land ownership, food sufficiency, employment status, annual earnings, type of house, type of roof, source of drinking water, latrine, household goods, electricity and water access, kitchen gardening, cattle farming and loan history. Changes in client poverty status are monitored each time they apply for a new loan.

4.2. Poverty Targeting:

4.2.1. Does the organization use a poverty targeting tool?

4.2.1.1. If so, what method is used? Do the methods assess absolute or relative poverty?

Nirdhan’s poverty targeting tools are described above in the sections 2.2.2.3 on client selection and eligibility and 2.2.2.4 on poverty assessment. Clients are categorized by relative poverty levels based on how much land they own.

4.2.1.2. Is the organization satisfied with the targeting tool it uses? Why/why not?

Nirdhan is satisfied with its targeting tools because housing quality and land holdings are clear indicators for measuring poverty in the rural sector. However, Nirdhan is challenged to develop new methods for targeting poor clients in semi-urban and urban areas as land holdings are less indicative of poverty than in rural areas.

4.2.1.3. Is the poverty assessment tool used for selection? If so, what are the poverty criteria and indicators?

As described in sections 2.2.2.3. and 2.2.2.4., Nirdhan uses poverty assessment in its client selection process. Criteria and indicators are described above.

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4.2.1.4. How was this tool developed? What were the reasons for developing and using a poverty tool? What has been the result?

Nirdhan’s poverty assessment, selection and monitoring systems were developed in house, based on Grameen tools, and tailored to local conditions in Nepal. Nirdhan has also contracted local technical support for development of its information management systems and Client Data Monitoring System. The development of systems for measuring poverty outreach was a natural extension of Nirdhan’s mission to reduce poverty in Nepal. In order to fulfill their mission, Nirdhan had to develop the analytical, training and information management tools necessary to ensure that Nirdhan’s services indeed reach the poor.

As Nirdhan’s portfolio has grown, they have been required to develop more sophisticated systems to capture and analyze poverty data. Although Nirdhan’s management information systems have evolved from simple spreadsheets to a fully integrated management and financial information system, the source of all of their poverty data remains standardized survey, means testing and monitoring forms that are filled in by loan officers based on first-hand interviews with clients. The quantity of data created by this system poses a challenge for Nirdhan regarding how to effectively analyze and efficiently use this information.

4.2.1.5. What type of issues has the organization encountered as a result of using poverty targeting tool?

Over time Nirdhan has overcome several important challenges in implementing poverty targeting. One key lesson from this experience was that poverty targeting must be systematically incorporated into the institution’s management systems. For example, if the board of directors decides to introduce a new poverty indicator, such as outreach to excluded social groups, this requires changes along the entire chain of management systems, from loan officer training, to loan administration, to management information collection and processing. Another lesson was that developing products which target the very poor requires an integrated approach offering both financial and non-financial services. For example, in assessing the needs of ex-bonded laborers Nirdhan realized that targeting this very poor group would require not only loans, but also a comprehensive package of financial services, business and literacy training and social outreach. A final lesson was that poverty targeting must reflect the context and situation of clients it is trying to reach. For example, poverty targeting tools that work well in rural areas, such as land ownership, may be much less effective in urban areas.

4.2.1.6. Are there other factors that lead to serving high numbers of very poor clients?

While a number of sophisticated systems for accurately measuring poverty outreach are currently being developed and tested, simple intuitive targeting methods can also promote poverty outreach. One of the simplest ways to reach large numbers of poor people is to set up operations in areas with high concentrations of poor people. Another simple pro-poor targeting mechanism is to develop products and services that reflect the needs and abilities of poor clients. Linkages with other organizations that

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are serving poor clients can also increase the pool of potential clients and help a MFI to reach larger scale. Finally, in order to avoid mission drift and ensure that an organization continues to reach poor clients, it is necessary to build an institutional consensus regarding the importance of serving the poor from the newest loan officer recruit to the chairman of the board. Equally important, systems must be developed and put in place to ensure effective targeting, selection and measurement of poor clients. These systems include not only management information systems, but also recruitment, training and staff incentive systems.

5. Products and Services5.1. Financial Products

Table 8Microfinance Product DetailsProduct Features and Policies

MicrocreditIndividual or group product

Loan terms (maturity, interest rate, interest type, flexibility)

>Group loans range from 6 months to 6 years, with an interest rate of 10-20%, depending on the product. Interest collected on declining balance. >Individual loan is offered up to 3 years with an interest rate of 18% on a declining balance. >Self reliance group wholesale loans are offered at 15% declining.

Loan source Nirdhan Bank

Loan useIncome generation, household consumption and emergency loan products

Loan size (first loan, average loan, maximum loan size)

First loan size: $215Average loan size: $157Maximum loan size: $1,430

Meeting requirement and frequency Bi-weekly

Mandatory savings requirement and amount

5% of loan disbursement except for collateralized housing, individual, foreign employment and educational loan

Collateral requirementRequired for housing, individual, foreign employment and educational loans

Other eligibility requirements Good credit history and sufficient collateral

Loan default policy

As per Central Bank default directives, 1-90 days overdue: 1% provision91-180 days overdue: 25% provision181-365 days overdue: 50% provisionMore than 365 days: 100% provision

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Product Features and Policies

Repayment incentives

Loan officer salary increase based on:PAR- incentive from 2.5% to 10%New clients- incentive from 1.25% to 5%Existing clients- incentive from 1.25% to 5% Portfolio value- incentive from 1.25% to 5%

MicrosavingsIndividual or group Both individual and group savings

Savings TypeGroup savings fund, personal saving accounts and center savings fund

Deposit location Centers and branch offices

Deposit frequency, amounts, flexibility

Deposits at bi-weekly center meetings or at branch offices.Clients deposit $0.14 at every meeting into group savings.Group fund saving deposits are mandatory.

Meeting requirement and frequency Bi-weekly

Savings terms

Provided 6% annually and calculate on declining basis. Personal saving account can be opened with $0.70, with deposits as low as $0.14.

Withdrawal and savings use policies

Personal saving is voluntary and can be withdrawn at will.Group fund savings can withdrawn up to 50% after 5 years.

Record keeping and accountingClient passbook, group collection sheet, branch sub ledger, branch main ledger

Investment of deposits On lendingMicroinsurance

Microinsurance Type Micro life insuranceGroup or individual product Offered through groups to individualsTerm 1 yearEligibility requirements Age should be between 16 to 64 yearsRenewal requirements Within 15 days of policy maturityRejection rate RarelyVoluntary or compulsory Voluntary

Product coverage (benefits)Funeral activity, loan write off, cope the transitional period of death.

Pricing – premiums

Premium of $1 for benefit of $142,Premium of $20 for benefit of $285,Premium of $4 for benefit of $571.If death happens due to accident then benefit is doubled.

Pricing – co-payments and deductibles No co-payments or deductiblesPricing – other fees No

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Product Features and Policies

MicrograntsIndividual or group product N/AAmount (and number of grants) N/AEligibility requirements N/AGrant use and other conditions N/ASavings requirement or matched savings arrangement

N/A

Straight grant, no interest or partial repayment

N/A

5.2. Microenterprise Development Services

Table 9MED Service Details

Service Types and FeaturesTraining

Financial literacySelf-reliance group executive committee trained in basic numeracy

Business planning and management Provided by Nirdhan NGO onlyMarketing Provided by Nirdhan NGO only

Recordkeeping and bookkeepingSelf-reliance group executive committee trained in record keeping

Skill development Provided by Nirdhan NGO onlyTechnical assistance Provided by Nirdhan NGO onlyTraining method Adapted from Grameen and MicroSave Costs to client Free or cost sharing depending on topic

Business Consultancy and Advisory ServicesIndividual or group sessions Self-reliance groupsFrequency Bi-weeklyTopics Different business-related issuesConfidence Building Yes Costs to client Free

Market LinkagesInput supply Livestock feed, piglets and chickensMarketing Assistance N/AMarket Information N/AProducer organizations N/ABusiness linkage promotion N/AQuality Control N/A Costs to client According to value of input supplied

OtherEmployment generation N/ATechnology development N/A

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5.3. Non-financial Services

Table 10Non-financial Services Details

Service Types and FeaturesIntegrated Education Component (IEC)

Health and NutritionHealth and sanitation

Free training provided at bi-weekly self-reliance group meetings

Healthy pregnancySafe motherhoodChild nutritionChildhood diseases and vaccinations

Family EducationGender parity

Free training provided at bi-weekly self-reliance group meetings

Equal responsibility for choresEqual rights in using incomeJoint decision makingFamily support through income generating activities

Social Capital DevelopmentSocial interaction

Free training provided at bi-weekly self-reliance group meetings

Communications skillsSelf-expressionManagement skillsMarketing skills

Basic Literacy:Basic literacy

Free training provided at bi-weekly self-reliance group meetings

Basic accountingBasic legal educationBasic interest rate calculation

5.4. Design and Product Development:

5.4.1. Program Rationale

5.4.1.1. What is your theory of change? According to the General Manager of Nirdhan, the Bank operates on the premise that change is created through promoting positive improvements in the living conditions of their clients. However, real change requires not only improvement in client household resources, but also in client attitudes and client empowerment. It is Nirdhan’s hope that these changes will move their clients from struggling to meet their basic needs to aspiring to fulfill their higher needs.

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5.4.1.2. What did you know about client behavior that led you to this intervention?

Through regular close contact with its clients, Nirdhan understands that they need both skills and access to finance in order to improve their livelihoods. While many Nirdhan clients have by necessity developed the skills to survive in impoverished communities, they have lacked access to financial services that will help them to grow out of poverty. For these clients, providing access to financial services is sufficient. However, other clients need more than financial services alone. For these clients, integrated financial, social and educational services are required to help them lift themselves out of poverty.

5.4.1.3. What are the intended impacts of your program? The eventual impact that Nirdhan hopes it will have on its clients is to help them to improve their living standards sufficiently to move out of poverty. By increasing their access to financial and other services, Nirdhan hopes to not only increase its clients’ financial resources, but to empower them to better their lives.

5.4.1.4. How are the inputs designed to achieve those intended impacts? Nirdhan’s products are designed with the intention of meeting the needs of the poorest of the poor. In order to do so, Nirdhan reduces barriers to access to financial services by designing simple loan products with an easy application process. Financial products are also priced affordably and loan terms and conditions tailored to be accessible to the poorest. Services are delivered in the communities where poor clients live and work and loan officers are trained to be sensitive to the multiple needs of the poor. Finally, financial services are often integrated with non-financial services, delivered either by Nirdhan Bank or Nirdhan NGO.

5.4.2. Concept Development

5.4.2.1. Client demand survey /Needs assessmentTo understand the needs of its clients, Nirdhan employs the same tools it uses for poverty targeting. These include rapid rural assessment and means testing tools which are part of Nirdhan’s loan process. In addition, during bi-weekly repayment meetings Nirdhan’s loan officers note issues and ideas from clients and report them to their branch manager. At the annual center chiefs meetings, clients are specifically asked for feedback on currently products and on their demand for new products. Focus group and individual interviews are also carried out periodically in order to design or improve financial products. In addition, Nirdhan occasionally hires outside consultants to assess client needs for products which are outside of Nirdhan’s primary expertise, such as the recently developed Information, Education and Communication training.

For the development of the ex-kamaiya products, a more structured needs assessment methodology was used which employed a range MicroSave tools. This included using Venn diagrams to understand the organizations and social structures which are important to the clients. Chapati diagrams were also used to assess client’s social capital. A

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number of other tools, including surveys of income seasonality, life cycle profile and time series of crisis, were used to gather and analyze data regarding the timing and impact of major events in clients’ lives. In addition, one on one interviews were conducted to gather more in depth information.

5.4.2.2. Competition analysis In analyzing its competition, Nirdhan uses a combination of intuitive, but effective approaches. This includes direct primary and secondary research to analyze its competitors’ product and pricing strategies. Because the microfinance community in Nepal is fairly small and close knit, Nirdhan managers can visit with competitors directly and talk with their management. Due to Nirdhan’s pre-eminence in the sector, they are also regularly asked to train the staff of other MFIs on tools such as Microfin, which offers them an up close opportunity to understand how their competition operates. In addition, Nirdhan has taken the somewhat unusual strategy of buying shares in competing MFIs in order to gain a seat on their board. Finally, Nirdhan researches competitors’ products and pricing indirectly through secondary sources such as advertisements published in local newspapers.

5.4.2.3. Self-assessment In order to assess its own performance Nirdhan relies on a range of mechanisms, some of which are used monthly, some annually and some only occasionally. On a monthly basis, Nirdhan performs an internal portfolio review, based on MIS reporting, which includes portfolio quality, profitability, productivity and efficiency, as well as ratio analysis. Every year meetings are organized to solicit comments and suggestions from clients and staff. Client meetings are attended by the chiefs of each borrower center. Annual regional staff meetings are held, with representatives from headquarters, area and branch levels. These meetings are not only an occasion to discuss problems and improvements needed, but also to review policies and procedures.

5.4.3. Product/Service Design

5.4.3.1. What was the process followed in product/service design?The product design process at Nirdhan uses both intuition based on knowledge of client needs and systems such as MicroSave’s product development tools. The process follows on to the steps implemented in the demand assessment, which are means testing, focus group interviews and discussions with center chiefs. Additional market research and competition assessment are gathered as part of the product design process. Based on all this information, the planning department uses MicroSave tools to develop specific products reflecting the needs and circumstances of its clients. Nirdhan also occasionally refers to outside consultants to assist with the development products which are outside of realm of its expertise, such as insurance and remittance services.

New products are typically pilot tested in 2 to 3 branches, feedback is solicited and modifications are made based on the pilot experience. Once the products are ready, they are introduced to the staff who are asked for comments. New forms and procedures are developed for the products and they are submitted to the board for approval. Once

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approved by the board, the Central Bank is informed and management systems are modified to include the new products. Finally, branch managers interested in offering the new product train their staff, who in turn train their clients, and product roll out begins.

The product development process for the ex-kamaiya products used a slightly more systematic process, following on to the needs assessment described above. Based on the information gathered by the needs assessment, a prototype product was developed. This prototype was then refine based a staff workshop and on client focus group discussions. After each focus group, the product was modified prior to presentation to the next group. Once Nirdhan was comfortable that the product met the needs of its clients, the product was finalized and new forms for loan applications, loan contracts, loan disbursements, client passbooks, and new ledgers for savings, loans, income and expenditures were developed. A manual on product development documented this approach, which included training materials for clients and staff on the new product. Once the product was finalized and all these materials were prepared, the process of product introduction, approval and roll out followed was similar that described above.

5.4.3.2. Was a new product/service specifically tailored to the needs of the very poor or was existing product/service tweaked to meet their needs?

In order to respond to client needs, Nirdhan has both modified existing products and developed new tailored products. Both follow the needs assessment and product development processes as outlined above, although modification of an existing product is less exhaustive than development of a new product.

A good example of modifications to an existing product are the changes that Nirdhan made to the standardized Grameen bank methodology. In response to client requests, and in order to increase the flexibility and usability of Grameen products, Nirdhan introduced several recent modifications to its group loans including: allowing clients to reschedule loans in the case of business slow down or family emergency, introducing of a line of credit to allow clients to “top off” existing loans before they are fully paid back and allowing clients to borrow for a 3, 6 or 9 month term in addition to the standard 12 month loan.

Tailored products developed specifically to serve poor clients include kamaiya ex-bonded laborers and rural hill country self-reliance groups products. In the case of ex-bonded laborers, Nirdhan Bank developed an integrated package of financial and non-financial services to help build their assets. This package typically includes 6 months of training in literacy, numeracy and entrepreneurship from Nirdhan NGO prior to receiving a very small loan from Nirdhan Bank. In the case of rural hill country clients, Nirdhan fundamentally altered its standard Grameen methodology to move from direct lending through groups to wholesale lending to village banks. This change in methodology has been costly in the initial start up as it requires significant additional training for village bank executive committees, but Nirdhan hopes that it will eventually prove a more effective and efficient way of reaching remote rural communities.

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5.4.3.3. What were the cost trade-offs?Because Nirdhan does not cost individual products, they have no specific data on the cost trade offs between modifying and tailoring products. Intuitively, it is less expensive to modify an existing product. For example modifying the Grameen methodology by moving from weekly to bi-weekly group loan payments, did not require extensive market research or product development costs. When it develops new products or opens offices in new areas, it is Nirdhan’s strategy to solicit funding from donors to pay for the start up costs. In the case of both the ex-kamaiya and hill country self-reliance group village banks, product development costs were funded by the ILO and USAID.

5.4.3.4. Risk assessment and tool design Risk assessment tools used by Nirdhan are implemented at two levels, loan risk and portfolio risk. For group loans, the only form of risk assessment is through the group formation and recognition process. Prior to forming a group, loan officers visit each potential client’s home. After groups are formed, they go through training and are required to save every two weeks for 6 months, during which time their performance is monitored by the loan officer. When they apply for group recognition, their loan officer assesses whether the group is ready or not to begin borrowing before submitting their application the branch manager for approval. Once a group is approved, risk is assessed by their loan repayment record. For individual loans, risk assessment is more extensive and systematic and includes analysis of project viability and profitability, client integrity, credit history, financial resources, collateral, potential market and distribution capacity.

At the portfolio level Nirdhan assesses risk by monitoring loan repayment information. In the field, loan officers receive a print out of loans due for the week from their branch manager. After meeting with their borrower groups, they then report back to the branch office on which loans have not been paid. The branch manager passes this information on to their area office, which passes it on to the accounting office at headquarters where it is and is compiled and analyzed by the MIS system and portfolio at risk ratios are calculated.

5.4.3.5. Prototype development and testing In most cases, Nirdhan follows the product development process outlined above for developing and testing prototypes. This includes focus group interviews, product design, piloting and modification, then roll out. Prototypes are always developed for new products with which Nirdhan has had no experience, such as life insurance and money transfers. However, for some modifications to existing products prototypes and pilot tests are not needed, rather changes are simply introduced and rolled out through the organization.

5.4.4. Pilot testing

5.4.4.1. Significant changes during pilot testing? Through the pilot testing process, Nirdhan has learned valuable lessons and made important modifications to new products, particularly with products which represent new lines of business to Nirdhan. For example, the new life insurance product that Nirdhan

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recently pilot tested originally copied the same standard forms and procedures used by their insurance company partner. However, because Nirdhan’s clients are different than the insurance company’s regular clients, they discovered significant issues which rendered the product difficult for their clients to use. For one, the application form was long, complicated and required numerous signatures. After piloting, Nirdhan adapted the forms to be simpler and require fewer signatures. Another major change that Nirdhan made after pilot testing involved the way that death benefits were approved. The insurance company originally required that clients produce an official death certificate signed by a local government official. These were difficult and costly for clients to obtain (or impossible to obtain during general strikes), particularly for rural clients. Nirdhan modified this policy to permit the deceased client’s former group members to sign a notification of the client’s death.

Another interesting example of changes that Nirdhan made to a new product after pilot testing was the costing of their money transfer services. Nirdhan initially negotiated a deal with two commercial banks to act as an intermediary for remittances to its clients based on a 50/50 commission split. However, Nirdhan did not do a thorough cost analysis of whether this product would make or lose money. In testing this product, Nirdhan quickly began to receive feedback from its branch managers that the telephone, fax and other related costs to deliver remittances at the branch level were greater than their income in commissions. Based on this information, Nirdhan is currently renegotiation with its bank partners for a 60/40 split of the commission fees.

5.4.5. Rollout As it has introduced new products, Nirdhan has learned valuable lessons from experience. Prime among them is that any changes to the way the organization does business at one level require changes to procedures and systems at all levels of the institution, from client groups in the field to the board of directors in Kathmandu. Simply adding another spreadsheet to the MIS system to monitor the new product is not sufficient. Budgets and financial projections need to be modified, new forms need to be developed and existing manuals and reporting systems modified, loan officers need to be trained, clients need to be informed, etc. In addition, changes to incentive systems need to be considered if these changes impact the reward structure of the existing system (for example, adding a group education and training component could reduce the amount of time loan officers have available to recruit new clients which could in turn decrease their incentive bonus).

5.4.6. Product/Service review and assessment Review and assessment of products and services at Nirdhan relies on a similar process to that of needs assessment and product development. Loan officers listen to client feedback at weekly meetings and report issues to their branch manager, who in turn reports to the area manager. In addition, annual meetings are held with center chiefs where issues regarding Nirdhan’s products and services are discussed. Annual regional staff meetings also offer an opportunity for staff and management to discuss what problems and improvements to products and systems. Occasionally Nirdhan will request that outside consultants who are surveying existing clients also include exit clients with former clients to assess what they liked and didn’t like about Nirdhan’s services.

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5.4.7. Product Development Cost

5.4.7.1. Total cost In general, Nirdhan monitors income and expenditure on a portfolio wide level, including budget variance and operational and financial self-sufficiency. While Nirdhan closely monitors total income and expenditures, they do not practice cost accounting so are unable to determine the total cost to develop or offer any particular product. However, with services (such as life insurance and remittances) which require linkages with outside providers, they are able to offer a better approximation of whether these products make money for the organization or not.

5.4.7.2. How were they fundedA mix of donor and internal funding has been used to support product development. For example, the ex-kamaiya product was developed with funding from the ILO and the hill country products with funding from USAID, but life insurance and transfer payments services were developed with internal funds. Nirdhan has a clear preference for sourcing donor funds for development of new products and outreach to new areas.

5.4.7.3. Outsourcing during the development processMost new products are developed internally by Nirdhan’s planning department. However, if a new product requires expertise in an area where Nirdhan does not feel it has technical competency, they will contract out for professional advice and support. In the case of the Client Data Monitoring System and the Information Education and Communications training curriculum funded by Plan International, Nirdhan outsourced local technical assistance for the development of both products.

5.4.8. Feedback loopFor Nirdhan management, two primary feedback indicators on the organization’s success at reaching its clients are loan repayment and repeat borrowing. Other systems for soliciting feedback have been described above. These include weekly contact with clients by loan officers and annual meetings with center chiefs. Although it is not a regular feedback tool, exit survey was included in Nirdhan’s recent impact assessment study. This survey asked previous clients how they felt products and services could be improved. Suggestions for changes included lower interest rates, increasing loan size, providing skill training, simplifying loan procedures and decreasing meetings.

5.5. Implementation Process

Summary of work plan, action steps and example of the typical process followed. The development of Nirdhan’s annual work plan begins in the field, with branch managers meeting with loan officers to discuss performance targets for the upcoming year. Branch managers then meet with area managers to come up with area-wide targets. Each year in early June Nirdhan organizes an annual programming and budgeting workshop where the targets submitted by branch and area offices are discussed, budgets established and a strategy for the year developed. (Nirdhan’s planning department

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compares targets proposed by field offices with its own projections developed on programs such as Microfin.) By the end of the Nepalese fiscal year (June 15th), the work plan and budget for the following year are finalized for board approval. By July 15th the board discusses and approves a work plan and budget, at which point the targets for each area and branch are officially established. Later in July, area managers hold regional planning workshops to discuss the targets and strategy for the year with branch managers. Branch managers then meet with loan officers to discuss targets for the branch and set targets for individual loan officers.

A specific example of Nirdhan’s of project work planning process can be observed in a recent grant from USAID to develop new products and open new branches in underserved rural hilly areas. The grant work plan included action steps which began with a survey of potential areas for opening new branches, rapid rural appraisal of promising communities, collection of government statistics on the area, and analysis of the competition. Market surveys were then designed and implemented through focus groups and individual interviews. Based on these surveys, the planning department used MicroSave tools to develop new loan products, which were again tested and adjusted based on focus group feedback. With all this information in hand, a business plan was drafted for each new branch. These business plans were presented to the board for approval. Once approved, staff were informed of the plans, staff recruited and trained and offices equipped and opened.

6. Results6.1. Method of Measuring Results

6.1.1. What information does management use to track performance, results and impact?

Nirdhan’s performance, results and impact are measured at different levels using different tools. Financial performance is measured on a monthly basis through indicators such as portfolio at risk, operating efficiency, number and volume of loans and savings, etc. Programmatic results are also monitored on a monthly basis comparing targets set at the annual planning and budget workshop to actual results (i.e. number and volume of loans by branch and area, number of new clients, etc.). Program impact however is more difficult and costly to measure. Nirdhan has funded outside impact studies on a periodic basis, the first in 1996, the second in 2001 and the latest in 2006. These studies measured Nirdhan’s impact on clients’ economic, educational, social and health assets.

6.1.2. Where does this information come from? How is it collected and stored?Information on portfolio financial performance originates at the group level when clients and loan officers manually fill in savings and repayments forms during their bi-weekly meetings. (For individual loan clients, repayments are made at the branch level.) These forms are then brought to the branch office where they are manually entered into accounting ledgers and sub-ledgers. Savings and loan information is then automated at the area office level, from where it is sent to the accounting department at headquarters on compact disks. This information is downloaded into the financial and management

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information systems and compiled and analyzed on a monthly basis. Programmatic results are captured using the same manual and automated systems. Impact indicators are discussed below.

6.2. Impact

Through periodic impact assessments implemented by local consulting firms, Nirdhan has compiled a series of snapshots of its clients over time. The latest of these assessments dates from early 2006 and measures the impact of Nirdhan’s services on its clients’ assets and empowerment. Asset indicators used in the survey include economic assets such as income, expenditure, savings and food sufficiency. Other physical assets include housing conditions, access to utilities and land ownership. In addition, educational assets were measured such as percentage of school age children going to primary and secondary school and percentage of female school age children going to primary and secondary school. Social assets, such as female’s involvement in intra household decision making, female attitudes towards their future, female self-esteem and female participation in community activities were also assessed. Finally, health assets, such as access to quality health care (in particular gynecological care), childhood immunizations, access to pre and post-natal care and use of contraceptive devices were measured.

Findings from this study indicate that Nirdhan clients fall into the following poverty categories: very poor 26.46%, poor 37.08% and middle poor 36.46%. Despite a systematic pro-poor emphasis, it was found that Nirdhan’s services had a greater impact in helping clients move from being poor to middle poor than in helping to very poor clients to become merely poor. This said, Nirdhan has had a clear impact on a range of important poverty indicators. For example, 30% of clients had an increase in income and 30% also increased their savings. Of all clients surveyed, 28% improved their nutritional status and 74% improved food security. Finally, 86% increased their decision making on loan and savings use.

6.3. Cost Effectiveness and Sustainability

6.3.1. Scale and Replicability

6.3.1.1. What is the strategy for scale?To date Nirdhan’s growth strategy has been to build on their existing infrastructure and expanding laterally into underserved area adjacent to current branch offices. Since becoming a bank in 1998, Nirdhan achieved impressive growth in scale. From a portfolio of 9,000 loans averaging at $ 384,000 in December 1998, to 50,000 loans averaging at $4,762,000 in December 2005, Nirdhan has increased its number of loans more that 5.5 times and increased the value of its portfolio more than 12.3 times. Nirdhan’s plans for growth in the future are equally ambitious. From 58,000 loans in June 2006, Nirdhan plans to reach 140,000 clients by 2009 and more than 200,000 by 2015. If they can attain growth on this scale, they will be reaching close to 30% of the currently estimated number of microfinance clients in Nepal.

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In order to reach this scale, Nirdhan is pursuing a multi-tiered growth strategy focused on building systems capable of sustaining rapid expansion and of attracting the capital need for growth. At the grassroots level, Nirdhan continues to mobilize deposits from its members. (Savings form more than a quarter of its lending capital.) Nirdhan has also designed an incentive system that rewards loan officers for growth in both the volume and quality their portfolio. On an administrative level, Nirdhan is putting in place systems that will allow for sustained growth, such as their new integrated financial and management information system. On the investor level, Nirdhan has in the past been able to attract enough debt funding to meet its needs, but in order to strengthen their balance sheet, management has realized the need for more investor equity. Nirdhan recently more than doubled the amount of equity shares in the Bank, and offered dividends for the first time in order to attract new shareholders. Continued growth of paid in equity will also allow Nirdhan to meet Central Bank requirements for opening offices in new districts. (Their current capitalization level limits them to working in 10 districts.) Finally, Nirdhan is actively seeking donor funding to finance horizontal expansion into new areas, especially hilly and mountainous regions.

6.3.1.2. How replicable is the program?Because Nirdhan is itself a replica (of the Grameen Bank), management feels that, with modifications based on local culture, geography and population, the potential for replicating Nirdhan is also strong. The CEO of Nirdhan believes strongly in the replicability of the model and has already begun to develop plans for Nirdhan’s expansion into northern India. (Nirdhan’s headquarters in Bahairawa is only 20 kilometers from the Indian border.) However, one crucial factor contributing to Nirdhan’s success that will be very hard to replicate is the dynamic relationship between a visionary founding CEO and a pragmatic and financial-oriented GM. The skills, experience and personalities of these two men have been invaluable for Nirdhan’s growth and it is questionable that Nirdhan would have had the same kind of success without them.

6.3.2. Financial and operational self-sufficiency

6.3.2.1. Financial expense ratioAccording to recent data from the MixMarket, Nirdhan’s adjusted financial expense ratio for 2004 was 4.0%, which compares favorably to the 6.1% benchmark of other medium-sized Asian MFIs. This low figure is due largely to Nirdhan’s ability to source inexpensive loans from commercial banks which are required by the Central Bank to lend to the deprived sector.

6.3.2.2. Operational expense ratioThe MixMarket found Nirdhan’s adjusted operating expense ratio of 6.7% to compare extremely favorably to the benchmark of 18.2% for medium Asian MFIs. This low ratio places Nirdhan among the most efficient MFIs in the world. Much of this is due to Nirdhan’s ability to keep overhead costs low through a no frills management approach and access to an inexpensive labor pool of loan officers.

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6.3.2.3. Cost per clientNirdhan’s cost per borrower also compares favorably to regional benchmarks. In 2004, Nirdhan’s adjusted cost per borrower was $15 and cost per loan was $13. Regional benchmarks for the same year were $25 per loan and $20 per borrower.

6.3.2.4. Clients per staff memberRatios for borrowers per staff member were, however, below regional benchmarks. Nirdhan staff members averaged 131 clients each in 2004, while on a regional level staff members averaged 161 borrowers each. Nirdhan hopes that this ratio will increase with the growth of its self-reliance group model.

6.3.2.5. Average loan balance per borrowerIn comparison to regional benchmarks, Nirdhan’s average loan balance per borrower is relatively high at $113. Regionally, medium-sized MFIs in Asia manage and average loan balance of $94 per borrower. What is more telling is that Nirdhan’s average balance per borrower/per capita GNI is 44%, while the figure for comparable Asian MFIs is 20%.

6.3.2.6. Average savings balance per saverThrough its savings data, Nirdhan clearly demonstrates the strength of its poverty outreach relative to other MFIs in the region. Nirdhan’s average savings per borrower is $3, while the benchmark is $13. As an average number, this figure can cover up a very small number of large savers, but since every client of Nirdhan is required to save, this figure actually represents lots of very small savings accounts.

6.3.2.7. Portfolio at riskPortfolio at risk for Nirdhan is high by both regional and industry standards. At 6.8%, Nirdhan’s 2004 PAR is significantly higher than the regional benchmark of 1.1% and the industry standards of less than 5%. Since the MixMarket report, PAR has grown significantly worse, and as of June 2006 stands at 14.25%. A major external influence on loan performance has been the ongoing disruptions caused by the Maoist insurgency which have had a negative impact on clients’ ability to repay their loans. Another negative influence on portfolio performance has been the internal strain put on Nirdhan’s management systems by rapid growth. From 44,000 clients in 2004, Nirdhan has almost doubled its portfolio to 74,000 in 2006. Management believes that when new information systems are fully on line that their ability to control delinquency will improve.

6.3.2.8. Tailoring of product/service – does tailoring help/hurt efficiency?The efficiency impact of tailoring new products to reach the very poor depends on who bears the cost of developing and rolling out the product and then of delivering unremunerated non-financial services such as training and social outreach. In the case of Nirdhan’s hill country self-reliance group village bank product, the development and roll out costs were funded by USAID, which therefore had no impact on efficiency.

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However, the cost of implementing group formation and training over the long run will be borne by Nirdhan, which will require loan officers to spend more time with their groups and impact the number of clients each loan officer is able to serve. Nirdhan expects that this trend will eventually reverse.

In the case of Nirdhan’s ex-kamaiyai product, development costs were paid by USAID and implementation costs by the ILO. These costs therefore had no impact on efficiency. In addition, the design of this integrated product was structured so that a separate organization, Nirdhan NGO, will continue to bear the cost of offering literacy, numeracy and business training and social support to very poor clients, while Nirdhan bank is responsible only for lending. This product is likely to have a positive effect on efficiency because another organization is bearing the unremunerated cost of group formation and development and Nirdhan only needs to offer and recover loans. One interesting caveat to this equation is that, hoping to same time and money, Nirdhan NGO took over some of the groups that it is working with from other programs but found that the groups were often to large and poorly trained. While there can be certain advantages in working with pre-formed groups, these advantages can also be limited depending on how well the organization that formed them did its job.

6.3.3. Cost effectiveness of non-financial servicesBecause Nirdhan does not capture detailed costing data on its products, it is extremely difficult to estimate cost effectiveness of either financial or non-financial services. However, as shown in the example of ex-kamaiya non-financial services, is it clearly more cost-effective to have another organization offer these unremunerated services.

The question of cost-effectiveness takes an interesting twist when one considers that, as an organization, Nirdhan believes that offering non-financial services is an essential part of its mission to alleviate poverty, but that as an MFI, Nirdhan should not be offering these services directly. However, in many cases, non-financial services are either necessary or beneficial to the provision of financial services. For example, non-financial services such as training clients how to fill in their passbooks are necessary to the provision of financial services. Additionally, non-financial services such as business skill training can have a positive impact not only on clients’ ability to manage their businesses better, but also on their capacity to manage and repay their loans.

In reality, Nirdhan often crosses the line of separation between financial and non-financial services, in particular with its Information, Education and Communication (IEC) training curriculum. The provision of IEC training is a response to the dilemma posed by a situation in which a MFI believes that its clients need non-financial services, but there is no partner available or willing to offer these services to its clients. Thus, while Nirdhan does not believe it is cost effective for an MFI to offer non-financial services, they do so because they feel that their clients need these services, and because they believe that providing these services will eventually improve loan repayments.

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6.3.4. Strategies to cover/reduce costs

6.3.4.1 Delivery mechanismThe development of Nirdhan’s self-reliance group village bank product is an example of the trade offs that can be found in trying to reduce costs by implementing new delivery mechanisms. Because loan officers should be able to manage more self-reliance group clients than regular clients, the cost of wholesale lending to self-reliance groups should eventually be less than direct lending. However, the cost to build the capacity of these groups for self-management represents a significant front end investment. In addition, because Nirdhan has chosen to offer self-reliance groups a reduced interest rate (15% instead of the standard 20%), their income statement will take a hit with both decreased income in the long run and increased expenditures in the short run. Again, management feels that working through self-reliance groups will eventually reduce costs, but they have no hard data and these groups are too new to assess at this time.

Other modifications Nirdhan has made to the standard Grameen methodology have had a less ambiguous impact in reducing costs. For example, Nirdhan changed repayment meetings from a weekly to bi-weekly, thereby increasing the number of clients a loan officer can manage from 400 to 600.

6.3.4.2 Cross SubsidizationAlthough Nirdhan clearly subsidizes the cost of its non-financial services such as IEC training with income from its financial services, there are no hard data on the value of this subsidy by product. Nirdhan captures figures on the cost of offering IEC training, but not on the income from the specific loan products that this training supports. Therefore cross subsidies can only be measured on a portfolio-wide basis.

6.3.4.3 Private/public partnershipsRecognizing that poverty alleviation requires more than just access to financial services, Nirdhan has sought partnerships with other government and non-governmental organizations. For example, in the case of the ex-kamaiya product, Nirdhan took over groups of ex-bonded laborers that had been formed by the Ministry of Land Reform and a Nepalese NGO, Mahila Upkar Munch.

It is interesting to note that the potential for public-private partnerships changed dramatically when the Maoist guerillas effectively took control over most of the areas in which Nirdhan operates. Although Nirdhan enjoys the support of the government in the capital of Kathmandu, this is effectively meaningless in rebel controlled areas. Therefore Nirdhan has had to engage in a public relations campaign with the Maoists rebels to explain the goals, objectives and operations of the organization and to get permission to continue operating in areas they control. While Nirdhan’s relationship with the Maoist rebels can not really be called a partnership and was not designed to reduce costs, it has been absolutely necessary for them to continue to do business. Even though Nirdhan was one of the very few organizations able to continuing operating in rebel controlled areas, their relationship with the Maoist has not been without incident, and several Nirdhan

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branches were attacked and looted by rebels. It is interesting to note that in addition to communicating with the Maoist, Nirdhan’s public relations campaign also reached out to community leaders to remind them of the reasons for their presence in the community and to clients to remind them of the nature and value of Nirdhan’s commitment to serving their financial needs.

6.3.4.4 Automation to reach scale An important cost cutting strategy for Nirdhan is the installation of a new management and financial information system. By automating data collection and information management Nirdhan expects to cut staff costs at both field and headquarters levels. In addition, improved efficiencies through these new systems will free staff time to recruit new client groups and to better manage existing groups, increasing both the size and the quality of Nirdhan’s portfolio. It is also hoped that using automation to reach more clients while reduce portfolio at risk will also improve Nirdhan’s economies of scale.

7. Conclusions

7.1. Challenges and Pitfalls/Lessons Learned

7.1.1. ChallengesWhile there is room for debate regarding where Nirdhan has done well and where there is room for improvement in their outreach to poor clients, this discussion much take into consideration the challenges of the context in which Nirdhan is working. Nirdhan is operating in one of the poorest countries in the world, serving poor clients in remote rural regions, and they have been doing so during a 10 year old active conflict that has already killed 13,000 civilians. While this doesn’t necessarily mean that Nirdhan should be given leeway for basic issues such as their high portfolio at risk ratio, they should at least be given credit for overcoming fundamental challenges that have daunted less dedicated institutions as they have continued to actively target and serve poor women.

In addition to external challenges, Nirdhan is also faces internal issues as it focuses on serving the needs of the poor. One internal debate that is still not entirely resolved is that of how to remain a sustainable financial institution when client needs extend beyond savings and loans. Clearly there are large numbers of MFIs who have struggled with the same dilemma and are able to remain sustainable. Yet there appears to be an inherent tension in Nirdhan between wanting to offer profitable financial services, while knowing that many clients need more. This issue has been partly resolved by sourcing outside donor funds and forming strategic alliances with implementing partners in order to cover the costs of offering such un-profitable services as training and social outreach. Clearly, indications are that serving smaller numbers of very poor clients will not be as profitable as serving larger numbers of poor and middle poor clients. However, key to Nirdhan’s mission is the idea of uplifting the poor with its inherent financial implications.

The challenges of serving the very poor are more than a simple question of mission over money. Serious methodological challenges exist regarding just how poor even a dedicated pro-poor MFI can reach. Despite the fact that Nirdhan is both driven by pro-

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poor values and equipped with pro-poor management systems, the Nepalese Centre for Microfinance found that only 26% of their clients are very poor and 37% are poor. Is it possible that these figures indicate the limits of Nirdhan’s poverty outreach? Have they reached a trade off point between depth and scale where an increasingly greater effort will be required to reach and increasingly smaller number of very poor clients? And what will the impact of increased focus on the very poor be to efficiency and sustainability? Indications are that the pressures of dramatically increasing scale of outreach have had a negative effect on dept of outreach and that loan officers have found it easier to recruit more new poor and middle poor clients than very poor clients. However, until Nirdhan can effectively cost it individual financial and non-financial products and measure the impact of its services, these issues will remain open for debate.

Many of the methodological challenges that Nirdhan is faces in reaching the poor have their roots in systems-related issues. For example, while some degree of responsibility for Nirdhan’s very high portfolio at risk can be attributed to the Maoist insurgency, simultaneous rapid growth in outreach and downreach have created significant strains on Nirdhan’s management systems. Nirdhan’s Excel-based MIS system has simply proven inadequate to managing its growing portfolio and their new Oracle-based system has not been fully implemented yet. Also, while this new system should help Nirdhan to handle information more effectively, at present they are gathering more information than they can manage. This includes not only portfolio information, but also client poverty-related data. Nirdhan will need to overcome these information systems challenges in order to be able to effectively analyze the volumes of data they collect on each client and to begin to measuring the impact and effectiveness of their financial and non-financial services.

7.1.2. Lessons LearnedExperience in reaching very poor groups such as ex-bonded laborers has led Nirdhan management to the belief that simply wanting to serve the poor isn’t sufficient. Effective poverty outreach requires not only a desire to serve the poor, but also products and services that the poor need and can use. More often than not, this means more than just loans, but an integrated package of non-financial and financial services. In fact, many of the bonded laborers that Nirdhan is working with became bonded laborers by taking on more debt than they could repay and are therefore very reluctant to borrow again. For these clients, significant of training and social outreach to build their confidence and their assets is required before they are able and ready to borrow again.

A corollary to this lesson is that reaching poor clients requires not only will, but also management systems. Nirdhan is an excellent example of a pro-poor management ethos that begins at the bottom of the organization and continues all the way to the top. This requires the commitment of everyone from loan officers to board officers, but also the training, information, financial and management systems to effectively implement Nirdhan’s pro-poor mission. In addition, reaching large numbers of poor people demands systems robust enough to handle quantities transactions and manipulate data efficiently and effectively. Nirdhan is pushing the limits of its current systems and its ability to reach more and poorer clients will be negatively impacted until these systems can be replaced.

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With regards to developing and implementing pro-poor management systems, Nirdhan has found that simpler systems are often better. In order to reach the poor, Nirdhan built simple systems that would enable them to target and select poor clients and to measure poverty. For example, one of Nirdhan’s simplest poverty targeting tools has been to set up branches in poor areas. Another slightly more complex method of poverty targeting is developing products and services that are useful to the very poor and poor, but not to the better off. Nirdhan’s other poverty targeting tools include a list of seven means testing criteria for new clients, focused mainly on housing and land holdings, that are easy to gather and verify. By keeping these criteria simple, Nirdhan also helps to ensure that loan officers are able to collect and report client data accurately and efficiently. Simple criteria also allow for easier collection of follow on data between loan cycles in order to measure changes in client means.

However simple and effective any set of selection criteria are, Nirdhan has found that they need to be adapted to the context in which they are being used. For example, maximum landholdings as a selection criteria works well in rural areas, but not well at all in urban areas. And while a simple set of focused indicators may be adequate for capturing poverty outreach data, they may not be able to effectively measure poverty impact. In order to get an in depth perspective on poverty impact, Nirdhan has found it useful to hire a local consulting firms to organize statistically sophisticated studies and to measure the kind of information that Nirdhan’s means testing system simply doesn’t produce.

While it may seem obvious that in order to serve poor people, an MFI needs to offer products and services that they need and can use, the development of these products has been by no means self-evident. Nirdhan has learned from experience that the costs associated with developing pro-poor products are not reserved to the products themselves and do not end with the successful roll out of the products. While Nirdhan has been able to source donor funds for the product development and roll out process, few donors are willing to provide open-ended funding to subsidize product delivery. And although all new products require upfront investment of financial and human resources in design, testing and roll out, in addition pro-poor products also require ongoing investment in client targeting, selection and monitoring to ensure that services are effectively reaching the poor. Finally, many products require modification over time, means a long term investment in systems to capture client feedback and to refine products.

While volumes of best practices documents exist on product development, Nirdhan found that no new product can be developed in an institutional vacuum. In designing any new pro-poor product, consideration must be given for how it will fit in with existing structures and systems. One key system to consider in this context is the loan officer incentive system. If a new product is not made part of the existing incentive system, loan officers may be less motivated to promote it, or worse feel like offering the new product is negatively impacting their salary. Because it is easier to adapt from within a system than to introduce from outside of it, Nirdhan has learned from practical experience that it is often significantly simpler to modify an existing product rather than to develop an

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entirely new product. At the same time, management recognizes that entering a new market or reaching out to a new client group may inevitably require that new products be developed. Finally, Nirdhan has found that the most effective way of ensuring that a new product is meeting the needs of its clients is to regularly solicit client feedback on what they like and don’t like about the products and services they are being offered.

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Appendix 1

Contacts and Sources of Information

Anita Mahat, USAID/Nepal, amahat@usaid.gov, 977-1-427-0144, Box 5653 Kathmandu, Nepal.

Arjun Gurung, Save the Children, agurung@savechildren.org.np, 977-1-441-2598, Box 2218, Kathmandu, Nepal.

Arjun Khanal, Nirdhan Utthan Bank, Aryabhanjyang, Palpa, Nepal.

Bhaskar Mani Gnawali, Nepal Rastra Bank, bgnawali@nrb.org.np, 977-1-441-0515, Baluwatar, Kathmandu, Nepal.

Bhoj Raj Bashyal, Nirdhan Utthan Bank, bhoj@nirdhan.com, 977-71-523-764, Himali Path, Siddharthanagar – 7, Bhairahawa, Nepal.

Bir Bikran Rayamajhi, Nepal Rastra Bank, bbr@nrb.org.np, 977-1-441-2262, Baluwatar, Kathmandu, Nepal.

Chaitanya Gopal Dangol, Save the Children, cdagnol@savechildren.org.np, 977-1-441-2598, Box 2218, Kathmandu, Nepal.

Harihar Dev Pant, Nirdhan Utthan Bank, nubl@ntc.net.np, 977-1-426-2461, 125 Mirmire Marg, Anamnagar, Kathmandu, Nepal.

Hem Poudyal, Plan International, hem.poudyal@plan-international.org, 977-1-553-5560, Box 8980, Kathmandu, Nepal.

Hema Khadka, UNDP Microenterprise Development Programme, hema.k.c.@medep.org.np, 977-1-554-1951, Box 107, Kathmandu, Nepal

Jayakurdi Mahila, Nirdhan Utthan Bank, Aryabhanjyang, Palpa, Nepal.

Keith Leslie, Save the Children, kleslie@savechildren.org.np, 977-1-441-2598, Box 2218, Kathmandu, Nepal.

Khrisna Pradhan, Nepal Rastra Bank, kpradhan@nrb.org.np, 977-1-441-0515, Baluwatar, Kathmandu, Nepal.

Lakshaman Pun, UNDP Microenterprise Development Programme, lakshman.pun@medep.org.np, 977-1-554-1951, Box 107, Kathmandu, Nepal.

Naren Chanmugam, USAID/Nepal, nchanmugam@usaid.gov, 977-1-427-0144, Box 5653 Kathmandu, Nepal.

Neena Thapa, Nabil Bank, nthapa@nabilbank.com.np, 977-1-442-9546, Box 3729, Kamaladi,

Prabin Dahal, Nirdhan Utthan Bank, prabin@nirdhan.com, 977-71-523-764, Himali Path, Siddharthanagar – 7, Bhairahawa, Nepal.

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Prahlad Man Mali, Centre for Microfinance, pmali@cmf.org.np, 977-1-449-2042, Box 20933, Kumari Galli, Bhatbhateni, Kathmandu, Nepal.

Prakash Raj Sharma, Nirdhan Utthan Bank, prakash@nirdhan.com, 977-71-523-764, Himali Path, Siddharthanagar – 7, Bhairahawa, Nepal.

Ram Bahadur Yadav, Nirdhan Utthan Bank, prabin@nirdhan.com, 977-71-523-764, Himali Path, Siddharthanagar – 7, Bhairahawa, Nepal.

Santa Bahadur Gurung, Nirdhan Utthan Bank, Bastari, Palpa, Nepal.

Sarda Chandra Ghimire, Nirdhan Utthan Bank, Bastari, Palpa, Nepal.

Shankar Man Shrestha, Rural Microfinance Development Centre, rmdc@wlink.com.np, 977-1-426-8018, Box 20789, Putalisadak, Kathmandu, Nepal.

Sribindu Bajracharya, USAID/Nepal, sbajracharaya@usaid.gov, 977-1-427-0144, Box 5653 Kathmandu, Nepal.

Uddhav Poudyal, International Labour Organisation, uddhav@iloktm.org.np, 977-1-554-9590, Box 8971, Kathmandu, Nepal.

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Appendix 2

Socioeconomic and Poverty Indicators: definitions, explanations and sources

“Nepal Human Development Report 2004: Empowerment and Poverty Reduction” UNDP, Kathmandu, Nepal, 2005.

“The CIA World Fact Book” CIA, Washington, DC, 2006.

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