This project shall be the instrument referred to as such in article 1 of the Standard Basic Assistance Agreement between the Government of Angola and the United Nations Development Programme, signed by the parties on 18 February 1977. The host country’s implementing agency shall, for the purpose of the Standard Basic Assistance Agreement, refer to the Government co-operating agency described in that Agreement.
BUDGET (See Annex IX)
ANNEX II – Results Framework – Enabling Environment Component
Development of a diverse and robust micro, small and medium enterprise sector in Angola as contribution to the National Poverty Reduction Strategy
Specific outcome indicators will be mentioned in the three components of the project, namely microfinance, vocational training and business development services. The increase of the new micro, small and medium enterprises, the growth rate of the existing enterprises and a better knowledge of the informal sector and its contribution to the national economy will be success indicators.
The enabling environment component will be implemented through public private partnerships. The Steering Committee of the Angola Enterprise Programme will rally representatives from Government, private sector, including women and youth entrepreneurs. Through regular meetings the partnership will generate a debate that will lead to a common vision of the development of the micro, small and medium enterprise sector. A special attention will be given to coordination and systematic information exchange between all the partners involved in activities related to the promotion of the micro-entreprise sector in Angola.
188.8.131.52. Disseminate results of seminar nationally
Program Coordinator and Research Institution
184.108.40.206. Arrange third national seminar to discuss a national strategy development of micro, small and medium sector development
Consultants and travel
220.127.116.11. Disseminate results of seminar nationally
Program Coordinator and Research Institution
1.3. Regulatory and legal changes to create a more enabling environment for micro, small and medium enterprises development
1.3.1. Changes in legislation considered positive by representatives of Civil Society
18.104.22.168. Identify key areas of difficulty for Micro, small and medium enterprise development and form Taskforces which include representatives of appropriate stakeholders (Public sector, private sector, and specialists) to analyze problems
National Consultant (1) & International Consultant (1) and Program Coordinator
22.214.171.124. Taskforces report on the special challenges developed
Consultants and travel
126.96.36.199. Disseminate results of taskforces nationally
188.8.131.52. Negotiate with Banco Nacional de Angola a cost sharing agreement to establish a Microfinance Development Unit for 3 years.
184.108.40.206. Provide training to employees of Banco Nacional who will be responsible for the Microfinance Unit.
ANNEX III MICRO-FINANCE COMPONENT
PART I.A. SITUATION ANALYSIS
A.1. The current Situation
See Umbrella Document
A.2. The Problems to be addressed
Access to credit allows businesses to leverage opportunities, make productive investments and grow much faster. Comprehensive impact studies have also demonstrated that: (i) microfinance helps poor households meet basic needs and protect against risks; (ii) the use of financial services by low-income households is associated with improvements in household economic welfare and enterprise stability or growth; (iii) by supporting women’s economic participation, microfinance helps to empower women, thus promoting gender-equity and improving household well-being; (iv) for almost all significant impacts, the magnitude of impact is positively related to the length of time that clients have been in a microfinance program.2 Therefore the provision of credit has an important role to play in the development of the micro, small and medium enterprise sector in Angola, and will contribute towards the reduction of poverty
Estimated at between 400.000 to 500.000 (see analysis of market size in table below) micro and small businesses, the demand for microfinance services in Angola is largely unmet. It is estimated that most of these businesses could benefit from loans of no more than US 1,000.
FIGURE 1:ANGOLAN ESTIMATE OF MARKET SIZING
Total Inhabitants (estimate)
Number of households
Number of households with bankable micro enterprises in informal sector
Number of registered small enterprises
Total enterprises that have a demand for microfinance
Potential clients living in potential geographical coverage
No active clients/ total potential clients
Total Potential Active Portfolio
Hence, the problem to be addressed by this component of the Angolan Enterprise Program (AEP) is that most micro, small and medium enterprises do not have access to credit.
Currently only two institutions are specialized in the provision of credit to micro, and small enterprises, the commercial bank Banco Sol (no relation to the Bolivian bank) and the international NGO, Development Workshop. Their combined total active client base is less than 8,000 clients, and is heavily concentrated (>80%) in the capital, Luanda. These institutions are still in a pioneering stage with respect to providing microfinance as both are experimenting with different products and methodologies while experiencing volatile repayment rates. They have a predominantly social focus and do not yet provide their services in a profitable manner.
A new bank, which is expected to concentrate in micro and small business credit in (loans up to US$ 50,000), has requested a license from the Central Bank, and should begin trading under the name “Nosso Banco” by September 2003. It will be fully funded by bilateral and multilateral public investors in the form of grants and equity, and operationally managed by the German Consultancy bureau IPC for a period of at least three years.
It is clear that the micro-credit industry in Angola is at a very early stage in its development. If it is to expand to meet demand estimated earlier at over 500 thousand micro-enterprises, the current players will need to build capacity, and grow rapidly, and even so, there is room for new market entrants.
SMALL BUSINESS CREDIT
The Angolan commercial banks only reach a small percentage of the demand for businesses-loans between US$ 1,000 and US$ 50,000. Years of economic distortions and particularly the hyperinflation of the last decade have left a banking sector focused in attending the largest companies, and the richest families. The relatively easy profits earned from short term financial intermediation (import/export, foreign exchange, and salary transfers) do not encourage the banks to take risk through lending, particularly to the smaller enterprises. In the whole Angolan banking system today, there are less than 10,000 loans, the vast majority concentrated in Luanda.
Few Angolan banks target lending to the small business sector as part of their core strategy. Their appears to be a lack of knowledge of the potential market for loans less than US$ 50,000 and little understanding of the products and procedures necessary to penetrate this market.
A.3 Past initiatives and lessons learnt
Angola has little experience in provision of financial services to lower segments of the market. The experience of UNCDF in stimulating financial sector development in many countries around the world is shown below:
FINANCIAL SECTOR DEVELOPMENT TARGETING LOWER SEGMENTS (see stages of development in figure 2) In the start-upstage, semi-formal microfinance activities are introduced as experimental pilot projects. New products are developed and tested in the market. The challenge is in building a human resource base capable of delivering credit products while maintaining a high repayment rate. Awareness is built among many actors in the economy, from government, private sector to the clients themselves, that micro and small business entrepreneurs can be creditworthy. Although some pilot projects fail due to low repayments, others gradually adapt techniques and methodologies to the local context and begin to function well. In some environments where microfinance is initially operating outside a formal legal framework, successful pilots often convince local authorities to condone the activities, due to perceived benefits for poor households, employment generation and economic growth.
In the expansion stage, microfinance projects or programs become institutionalized (consolidated into institutions dedicated only to the provision of microfinance), as practitioners perceive the need to specialize. Successful microfinance institutions (MFIs) concentrate on expanding the scale of their existing operations. The success of their business model allows them to replicate their operational structure and capture a larger share of the market. Their approach is often copied by other microfinance operators. This stage is characterized by an expansion of existing institutions, and on resource mobilization to finance the expansion. The institutional growth leads to economies of scale and greater operational efficiencies. Eventually the more successful MFIs are able to finance their operations with the income generated by interest and fees. However MFIs continue to be subsidized by grants and soft loans to finance their expansion. The increased scale of operations requires further institutional strengthening, particularly in the areas of management systems and procedures. Towards the end of this phase MFIs are beginning to capture a large part of the market.
In the consolidation stage successful MFIs begin to focus on their overall sustainability. Management oversight, organizational policies, procedures and systems are managed in a more formal manner. The microfinance sector also begins to gradually establish accepted financial sector policies. Donor subsidies to the sector diminish in order to avoid creating institutional dependence, and distortion of market prices. As a consequence, MFIs are required to increase their productivity, expand further, and adjust their pricing policies to ensure greater profitability. At this stage, as the microfinance industry tends to have already achieved a high penetration rate in the original target market, institutions often expand into new markets and launch new, more flexible, demand-oriented products. The small and medium enterprises that continue to be underserved by the banks3 are often interesting clients to MFIs, while it is normal to see a broad range of financial services being offered such as savings, insurance, and transfers.
For the microfinance sector to advance to the next stage, it is necessary to have implanted a special regulatory framework, conducive to the development of the microfinance sector, and allowing for effective regulation by the Central Bank. The development of such regulations normally takes place towards the end of this stage when a critical mass of MFIs are willing and able to integrate into the formal financial system.
In the integration stage leading MFIs become an integral part of the formal financial sector, regulated by the central bank and offering a range of demand oriented products for the lower segments in the market. The integration of the microfinance sector into the formal financial system is necessary to finance the continued growth of the MFIs through access to commercial capital (deposits from the public, loans and equity). This stage is characterized by the transformation of MFIs into regulated financial institutions, the drying-up of subsidies for the microfinance sector, the expansion of microfinance institutions and the downscaling of commercial banks. Licensed MFIs continue efforts to downscale their services, often developing savings services for the poorest segments of the population. Instead of depending upon public-sector funds and subsidies, MFIs now contribute to the public sector through the taxes typically paid by financial institutions.
Figure 2. Stages of development of a microfinance sector
(No of Clients
Start-up Expansion Consolidation Integration
Figure 3. Downscaling of high-end commercial banks and Expansion of microfinance banks in the Integration Stage
Av. Loan O/S
100 * GDP
down scaling high end banks
10 * GDP
1.5 * GDP
expanding microfinance banks
0.5 * GDP
down scaling microfinance banks
At present the microfinance sector in Angola is in the start-up stage, with only two relatively inexperienced institutions specialized in offering micro credit. Experiences in other countries have shown that there are a number of requirements to be met before the sector can advance to the expansion stage:
i) It is of key importance that at least a few select MFIs develop a business model, which is appropriate to the local market conditions. These pioneers should implement credible business plans that demonstrate future profitability. The management applies sound microfinance principles, commits to scale up and become profitable. These become leaders, demonstrating that poorer populations and micro-enterprises are bankable.
ii) It is essential to have an enabling environment, conducive to the development of the microfinance sector. Wide spread supply-oriented microfinance programs with subsidized interest rates, do not allow for the emergence of a sustainable microfinance industry. Programs with low portfolio quality distort the market, and undermine the financial discipline of communities (increasing the pool of defaulters who are ineligible for subsequent loans) making it more difficult for successful programs to emerge. Also a repressive legal, regulatory or political environment will restrict the growth of microfinance sector (e.g. an interest rate ceiling defined in law which is too low for microfinance institutions to function without permanent subsidies).
iii) The government and international donors must be willing to invest in the establishment of a microfinance sector. Investment in the start-up phase is normally more risky than in later phases because of the absence of microfinance institutions that have a proven track record. Donors often provide more grants in the early stage, with the object of building the capacity of microfinance operations.
A.4. Development Objective (Relevant Outcome)
The objective is to develop, in partnership with stakeholders, a diverse and robust financial sector that provides financial services to micro, small and medium enterprises.
A.5 National Institutional and Legal Framework
Legislation in 1990 specifically permitted NGOs in Angola to conduct activities unrelated to government ministries, although it left the legal status of NGOs in general somewhat ambiguous. Due to the increasing number of international NGOs in Angola in recent years focused on humanitarian relief, the Government of Angola provided new legislation in December 2002. In law 84/02 of 31 December, 2002, various types of NGOs were defined (local, regional, national, international, etc), all under the regulation of the Ministry of Assistance and Social Reinsertion, acting through the Technical Unit for the Coordination of Humanitarian Aid (UTCAH, created by law 30/98 and involving representatives from all the ministries). The various activities that NGOs may carry out are specified, authorized partnerships are described, and the financial accountability (previous years accounts, plus estimate of future year’s donations) must be presented to the Central Bank, Ministry of Finance and the Ministry of Assistance and Social Reinsertion. It is interesting that there is no specific prevision for micro-credit in this legislation.
The 1999 Law on Financial Institutions (Law 1/99 of 23 April 1999) establishes the supervision and control of banks, finance companies, and credit cooperatives, and states that a separate law will “regulate the micro-credit institutions.” Currently, the Law on Financial Institutions allows only regulated banks and specially licensed finance companies to mobilize deposits from the public, while credit cooperatives may take deposits from members under certain conditions.4 The National Bank of Angola (BNA), the regulatory body, has demonstrated its openness to discuss drafts of the proposed law to regulate microfinance institutions. The mission team had the opportunity to meet with a senior official who offered to provide a copy of the draft legislation. Interestingly, the senior official mentioned that the BNA will not encourage banks to get involved in offering micro-credit because they fear it could put bank depositors at risk. The BNA official pointed out that Banco Sol is currently operating without a specific license to engage in micro-credit, and that the micro portfolio will be regulated as standard consumer loans.5 Commercial Banks in Angola, Credit and Deposit Volumes, July 2002
No. of branches*
Credit business (USD millions)
Deposit business (USD millions)
Banco de Poupança e Crédito
Banco de Fomento e Exterior
Banco Africano de Investimento
Banco de Comércio e Indústria
Banco Comercial de Angola
Banco Português do Atlântico
Banco Totta e Açores
Source: Banco Nacional de Angola - Exchange Rate: 1 USD = 44.5 AKZ
* refers to number planned by end 2002
A.6. Intended Beneficiaries
The direct beneficiaries are microfinance institutions that demonstrate the potential to deliver microfinance in a commercial manner. The project also supports commercial banks that are willing to downscale by targeting the demand for micro and small businesses.
Indirect beneficiaries are micro and small business entrepreneurs that can increase their livings standards by having access to financial services on a permanent basis, the unemployed who will benefit from increased employment opportunities from the expanding micro and small business sector and finally the population at large who will enjoy a more diverse and increasingly competitive financial sector.
PART I.B. STRATEGY
B.1 National Commitment to achieving the Outcome
Within the Angolan Government’s Interim Poverty Reduction Strategy Document, one of the principal axes of intervention, axis 5 speaks about the need for Integrating and articulating the productive structure through the:
Rural Development Strategy
Artisan Fishing strategy
Support and Development Strategy for Small and Micro Industrial Units
The development of a financial sector which offers credit to micro, small and medium enterprises throughout the country is clearly an essential element in this strategy.
In meetings with representatives of the UNDP mission, the Ministry of Women and the Family, emphasized that one of its goals is ‘the promotion of access to micro-credit services for women, heads of family, who live in the rural areas’, while the Ministry of Commerce expressed support for the expansion of micro-credit, as a strategy to support all micro enterprises. The central bank, Banco Nacional de Angola (BNA), is committed to expand the offer of credit, and is charged by the Angolan government with the development of the financial system in general. BNA should be seen as the logical partner to work with the Angola Enterprise Program to expand the offer of credit to micro, small and medium enterprises.
B. 2 Strategy for the use of AEP resources
The financial sector has until now been focused on the higher segments in the market. The long term objective of this project is to support deepening of the commercial financial sector to ensure sustainable access to financial services for small and medium enterprises while supporting the growth and development of microfinance institutions who will offer credit to the low-income population, in particular, micro enterprises.
In order to determine the support that would optimally stimulate the development of the Angolan microfinance sector, it is important to review the evolution of this sector in other countries. Although all microfinance sectors have unique characteristics and development paths specific to each country, it is possible to identify certain key stages that each sector passes through: a start-up stage, an expansion stage, a consolidation stage and an integration stage (see A3 – Past initiatives and lessons learnt).
The Credit Component of the Angola Enterprise Program will address the key constraints identified in A3, with the objective of stimulating the development of the microfinance sector to advance beyond the initial start-up stage.
A) The Program intends to support two existing Angolan institutions which specialize in microfinance, have the objective of reaching a large client-base becoming sustainable institutions. The size and nature of the support for the selected institutions will be based upon an institutional assessment and a business plan proposal which will evaluate the required capacity building as part of a performance based agreement.
The Program envisages the provision of support in the following areas:
1) The consolidation of existing micro-credit projects in micro-credit institutions;
2) Technical assistance in areas which have been key to the development of microfinance institutions in other countries such as governance, human resource management, financial management, MIS, market studies, product development, training of SME loan officers, creation of a credit information data base, etc.;
3) The establishment of model pilot branches which apply best practices in microfinance;
4) Visits to and training courses with experienced, internationally recognized microfinance institutions.
5) Grant funding where applicable.
B) The program will look to provide incentives for new market entrants. Market studies will be contracted, and results disseminated. Local partners and investors will be identified, and introductions made to international organizations that have experience with microfinance start-ups. Other technical assistance, as discussed in A) will be evaluated on a case by base basis.
The contribution of the Project will be structured in close collaboration with DFID, USAID and UNDP who currently provide financial support to Angolan microfinance projects.
There are a number of constraints identified in A3 regarding the lack of an enabling environment in Angola for microfinance development. The investments which the Angolan Enterprise Program will make to resolve these issues have been addressed in the Environment component.
EXPAND SMALL BUSINESS CREDIT
The Program will also support pilot projects for commercial banks which intend to venture into lower segments of the market. Support will be provided in the following way:
A) Banks may request the Program to conduct a market survey to evaluate the potential of a specific market or client base. Results of market studies will be disseminated among the financial sector in an attempt to identify which institutions have interest in pursuing the opportunities identified in the study.
B) The Program will enter into memorandums of understanding with financial institutions interested in implementing pilot projects. Investments in product development, and technology/methodologies tailored to risk management of a new customer base. The intention is that successful pilots will be replicated and expanded to other regions.
In this way the Angolan financial sector will be strengthened and expanded, increasing dramatically the supply of credit to the micro, small and medium enterprise sector.
Implementing Agency: United Nations Capital Development Fund (UNCDF)
Counterpart: Banco Nacional de Angola (Central Bank)
Review Committee: To review proposals from MFI’s and Banks, and accompany the progress of the Credit Component. This Committee will consist of: representatives from BNA, the UNDP, ChevronTexaco, Other donors (World Bank?), the bankers association, the national microfinance association (RASME)
Technical Service Provider: Recruited to provide the technical assistance needed by selected MFI’s
Short-term consultants: Various areas.(business planning, institutional assessment, product development, financial management, MIS, market studies)
Total Staff: Project manager,
Two local consultants full time (to be trained)
One Technical Service Provider
A.2 Monitoring, Measurement and Evaluation
The main performance indicators are:
1) The prevalence of profitable microfinance institutions
2) The number of micro and small businesses that have access to credit has increased from approximately 8,000 in December 2002 to 50,000 in December 2006, 80,000 in December 2008.
3) A supportive environment for the development of the microfinance sector based on national policy and action plan to support this sector.
A.2.1. Work planning, Monitoring, and reporting The project will be monitored, evaluated and reported upon in accordance with revised UNDP monitoring and evaluation procedures, which will be made available to the project management at the beginning of the project. The Microfinance Development Unit and Informal/ Small Business Research Unit will present a plan of their initial start-up of project activities, and subsequently at the beginning of each calendar year will draw up the project work-plans. It shall be submitted to the Steering Committee integrated in the Program Coordinator’s Annual Work Plan. An annual progress report will be submitted to the Steering Committee integrated in the Program Coordinator Annual Progress Report.
A.2.2. Evaluation An in-depth evaluation will be conducted 18 months into the implementation of the project, as part of the implementation of the UNDP Monitoring and Evaluation. This evaluation will be essentially thematic and will include other governance-related activities of UNDP, so as to determine internal synergies in UNDP interventions in this area. The terms of reference for the evaluation will be proposed by UNDP for discussion and approval by the AEP Steering Committee.