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close this bookSustainability of Micro-enterprise Credit Schemes in Kenya's Informal Sector (K-REP, 1993, 14 p.)
View the document3.1 Introduction
View the document3.2 Planning for Self-Sustainability
View the document3.3 Sustainability Ladder
View the document3.4 Role of monitoring and evaluation

3.1 Introduction

One word that is increasingly gaining currency in the development literature is the word "sustainability". The word may mean different things to different people but to people in the so-called third world countries (also called developing countries, underdeveloped countries and more recently countries of the South) that are involved in development programmes which depend on the largesse of foreign donors for survival it means being able to sever the umbilical cord that binds them to the donors.

For third world development organizations that depend on donor funds for both their existence and programme execution, "sustainability" means ability to continue involvement in development work, even after donor funds run out. To attain financial sustainability, sufficient revenues have to be generated from both programme activities and investments.

This is by no means easy to accomplish, particularly for institutions implementing social/welfare types of programmes with limited revenue base. Nevertheless, serious attempts are called for, given the ever changing donor climate whether influenced by politics or other factors. The current difficulties of acquiring donor funds and the bitter pills that come with the funds should jolt us towards giving sustainability more than just a casual glance.

Donors are increasingly paying greater attention to what happens after their grant ends, as many have been frustrated by the number of programmes which have "died" after funding is stopped. There is also unprecedented increase in demand for donor money, due to increased poverty in third world countries, and increase in disasters, man made and natural, as well as the number of agencies seeking donor financial support. Consequently, assistance is now directed to projects that not only yield the highest benefits to the people, but are also designed to become self-sustaining.

The purpose of this discussion is not to simplify an otherwise complex issue. It is widely recognized that certain development efforts (public goods) will always require subsidy. It would be foolhardy to suggest all development can become self-sustaining without considering the nature of the activities they undertake. The main focus of this short discussion is on "Sustainability for Micro-Enterprise Credit Schemes".

3.2 Planning for Self-Sustainability

Compared to many development programmes, credit schemes for micro-enterprise development have greater potential for becoming self sustaining, financially, and should not depend on donors funds except for expansion of the schemes and for financing those components of the programme that do not generate revenue.

Sustainability however, can only be achieved when a programme is well designed, planned and managed in a business like manner. NGOs are generally admired for their humanitarian predisposition which does not always come with good business management. The question is how NGOs can blend the good hearted nature they have, with the characteristics of successful business management.

The first step that needs to be considered, is internalizing the need for setting up self-sustaining schemes, making it part of the vision for the NGO. Many NGOs accept projects designed to become self-sustaining, simply because he donor says so and that's how to get funds. It is imperative that policy makers and chief executives believe in this goal before embarking on implementing credit schemes. Only then can good planning and management be effective. Secondly, there is the need for technically competent and committed staff.

Discussion on financial management principles and techniques needed for managing such schemes, is outside the scope of this paper. This discussion will center on a few simple techniques that can be instituted as a means of establishing a sound base for tracking progress towards self-sustainability.

3.2.1 Establishing Cost Centres

Where an organization is involved in various activities, whether related to credit or not, it is important to separate the functions and financial management of these activities. This can be done by establishing cost centers and determining which of the programme components are expected over time to generate revenues sufficient to cover related operating costs (profit centres).

3.2.2 Cost Classification

For each profit centre, costs may be classified under three main categories; Direct Costs, Operations Overhead, and Institution Overhead, as a basis for tracking the levels of cost coverage.

(a) Direct Costs include:

Direct labor


Salaries of staff that are directly involved in the production of goods/services (in this case salaries of credit officers).

Direct Material


Technically, direct materials refer to those raw materials that can be traced in the finished product. In the case service industries such as credit, there are no direct materials.

Direct Expenses


All expenses that are directly related to the production process. In this case expenses such as, passbooks, rent of credit office (not supervisor and managers offices), transport for delivering and collecting money, and all expenses associated with giving of credit.

These first three categories constitute what it known as Prime Costs and is the first level that NGO credit scheme should attempt to cover from credit operations revenues. In the K-REP sustainability plan, Prime Costs are to be covered in the first year of credit operation of the programmes. K-REP supported programmes were able to achieve this level of sustainability within 8 to 12 months of operation.

(b) Operations Overhead

The second category of costs, Operations overhead, is a group of operations expenses related to supervising and administering credit operations. These include salaries and fringe benefits paid to supervisors of credit officers, e.g. Branch Managers, Project Accountants, Secretaries, Messengers, cost of money, transport costs, electricity, telephone, postage plus any miscellaneous expenses associated with the credit operations including tea for staff if such is provided.

Once revenues reach a level where both prime and operations overhead are covered, a significant achievement will have been made. For if this level can be sustained, then at least the branch lending activities can continue without further donor input. This is level two of the sustainability ladder. Two K-REP funded programmes (Juhudi Eldoret and PCEA Chogoria) appear well on the path of meeting this planned target of sustainability within three years as per the plan. The other programmes will take longer to achieve this because of defaults that have undermined their achievement of sustainability within the planned period.

(c) Institution Overhead

Level Three of the sustainability ladder includes covering of institution overhead. This include the cost of managing the institution, developing programmes, and other establishment costs that cannot be allocated to the first two levels. Where an organization has many programmes, this cost is apportioned to all programmes. The problem is that many of these "other" programmes are usually non income generating, and so apportioning costs tot them serves no purpose. For credit operations revenues to cover some portion of institution overhead, is itself a great achievement. However, this is easier said than done. Moreover it is only a portion of institution overhead that can be covered, unless the credit programme is significantly large. To cover institutional overheads NGOs can resort to other non programme financial investments.

Level Four of the sustainability ladder include covering the institutional overhead as well as meeting training, Research and other developmental costs.

3.3 Sustainability Ladder

There are a number of steps on the road to sustainability, to which the sustainability ladder below is a broad guide.

Level IV - profitable banking operation, recovery of Headquarters, training, expansion research costs, independent of donors.

Level III - Complete Branch Sustainability. Over 100% recovery of branch costs; staff training costs covered, contribution to headquarter costs.

Level II - Financial systems Approach employed. All Prime costs and the branch overhead costs covered. Large outreach.

Level I - All prime costs covered by revenues. Low outreach. Financial Systems approach not internalized.

The institutional internalization of the financial system approach is the first stage toward sustainability. Level II leads towards an operationally effective and commercially based approach. The minimalist school is a financial systems approach (level II and above). The hardest transition is from level I to level II which involves a major restructuring of management, management systems and implementing capacity. K-REP supported minimalist programmes have all passed level I (recovering over 50% of branch costs) this is being greatly assisted by substantial investment income from loans and grants from K-REP which will diminish over time but will only be replenished if the programmes are effective in their operational management and their portfolio quality. Long term sustainability means total operational profitability and the generation of loan funds which must rely on the savings base of the programme. It is worth noting that the Grameen Bank is still subsidy dependent for expansion and training costs.

3.4 Role of monitoring and evaluation

Monthly monitoring of various indicators of performance is key to the success of credit programmes designed to be sustainable. K-REP collects monthly data on the following indicators of performance.

- Number of clients (disaggragated by gender)
- Number of loans disbursed
- Amount disbursed
- Amount due - principal and interest
- Amount due and paid - principal and interest
- Amount pre-paid - principal and interest
- Amount in arrears - principal and interest
- Number of loans in default
- Amount in default
- Repayment rate (quantitative and qualitative)
- Amount of outstanding loans
- Number of repeat loans
- Total branch operation costs
- Cost per loan
- Cost per Sh. 1 lent
- Total income realized (interest + fees)
- Sustainability index
- Total amount saved
- Savings forfeited
- Savings to outstanding loans ratio.

The monitoring data is analysed monthly and a report made to all concerned parties. This effort is complimented by internal evaluations which are done every two years and external evaluations every four years. In addition our operation research section undertakes in-depth study of various aspects of the programmes particularly on areas that undermine the sustainability of the scheme. For example, recently an in-depth study was undertaken on the defaulter problem while one is planned on membership turnover.