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Concern Universal Microfinance Operations (CUMO)

August 2010"); ?>
COMACO does not currently qualify for our highest ratings. More information:
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Updated: August 2010

Summary

CUMO is a microfinance institution in Malawi owned by the U.K.-based charity Concern Universal.1 CUMO offers micro-loans and micro-insurance. It is not licensed to collect savings, though it encourages its clients to save through formal banks.2 Our review of CUMO consisted of reviewing information CUMO sent to us and phone conversations with Samson Hailu, the chair of CUMO's board of directors, and Ezikiel Phiri, CUMO's CEO. CUMO is notable for its commitment to monitoring and evaluation of its programs, including conducting regular surveys of clients who drop out of the program and commissioning the rating agency M-CRIL to conduct a detailed social performance assessment. We do not currently recommend CUMO, feeling that the Small Enterprise Foundation provides a better opportunity for donors interested in supporting microfinance.
Table of contents 

Key questions about social impact

In evaluating CUMO, we asked our key questions for evaluating microlending charities. The sections below cover its answers to our key questions (see the previous link for why we consider these questions important).

Is the organization focused on social impact?

How frequently do borrowers drop out of the program?

CUMO reports drop out rates of 5.5% in 2008 and 1.1% in 2009.3 CUMO calculates its drop out rate as the proportion of clients who dropped out during out during the period over the number of clients that existed at the beginning of the period,4 and told us that a drop out is any client who completes a loan cycle and does not take out another loan right away.5 We have remaining questions about apparent inconsistencies in CUMO's reported drop out rates.6 CUMO told us that it considers its retention rate to be one of the most important indicators of its success and that CUMO's board sets targets for this rate.7 Loan officers' pay is partially tied to the drop out rate among clients they serve.8 For more information on microfinance drop out rates and how they are calculated, see our microfinance glossary.

Does CUMO monitor why borrowers drop out?

M-CRIL notes that CUMO conducted studies "of good quality" in 2005, 2006, 2007, and 2008 of the reasons why clients drop out of the program. CUMO shared with us reports from surveys conducted in 2003 and 2008. The 291 drop outs surveyed in 2008 reported the following reasons for leaving:9 The 2008 report does not specify how drop outs were selected for inclusion in the study, so we do not know if the above responses are representative of all drop outs. That said, CUMO's drop out monitoring appears capable of identifying problem areas and the frequency with which CUMO has conducted surveys suggests a commitment to gathering client feedback. Comparing the 2003 and 2008 reports, it appears that CUMO has changed some policies in response to the feedback they received, while other problems are cited in both surveys. In 2003, clients complained about having to repay for group members who had died.10 By 2008, CUMO had instituted an insurance program that covers a deceased member's outstanding loan.11 Clients had issues with the frequency of repayments in 2003,12 and this remained a major reason clients cited for dropping out in 2008. CUMO told us that it has responded to this concern by giving clients an option of paying fortnightly or monthly.13

Does CUMO prevent client over-indebtedness?

CUMO told us that it does the following to prevent over-indebtedness among clients:14 CUMO also told us that, while client indebtedness is monitored periodically, CUMO does not have an ongoing, formal process for monitoring whether clients take on too much debt.15 CUMO's 2006 Impact Assessment noted there were clients "who had clearly struggled with their loans, perhaps having taken too large a loan or taken it at the wrong time and who had had to sell assets to make repayments."16

Are borrowers protected against harassment by loan officers and group members?

The rating agency M-CRIL reports that CUMO's internal auditors visit each of CUMO's 11 districts at least annually and evaluate "measures taken in the case of delinquent loans to make sure that staff are acting in accordance with CUMO policies and clients are not being unduly harassed." M-CRIL also reports that "audit reports are detailed and of good quality, with recommendations for corrective action."17 M-CRIL also notes that "regional managers and BAS [business area supervisors] provide their mobile numbers to the clients so that in the event of any problem the clients can freely report to CUMO,"18 though M-CRIL still believes that "a formal grievance addressal process should be made available to the clients. Most clients depend on the FSOs [financial service officers] for conveying any form of feedback."19 Loan officers' pay is partially based on their performance, specifically managing a large number of clients and a high portfolio growth rate, and maintaining a low drop out and a high repayment rate.20 It is possible that incentives to have a large portfolio and high repayment rate could lead to loan officers pressuring clients to repay or to take out loans they wouldn't otherwise have taken out. On the other hand, loan officers are also rewarded for maintaining a high client retention rate, which could lead to better treatment of clients. We note that CUMO planned to intensify arrears collections in May and June 2010.21 We would like to know how CUMO protects clients from harassment during such activities. CUMO told us that pressure is applied by group members, not loan officers, but after discussing this issue with CUMO,22 it remains unclear to us how clients are persuaded to repay during such activities.

What interest rates does CUMO charge?

CUMO provided example repayment schedules for its 3 most popular loan types (out of 4 total types). We used these schedules to calculate the cost of borrowing to clients.23
Loan type% of CUMO's loan distributionsMonthly rateAnnual percentage rate (APR)Effective interest rate (EIR)
Masika (business loan targeting small scale entrepreneurs)64%13%156%354%
Fumba (agricultural input loan for existing Masika borrowers)31%6%72%102%
Mtenthandevu (small holder tea growers product)3%4%53%69%
Kasupe (business loan targeting medium scale entrepreneurs)2%N/AN/AN/A
Note that we assumed that the repayment schedules did not include the cost to clients of fees and savings requirements, and we have added these effects.24 Comparing these rates to the Reserve Bank of Malawi's Bank Rate (15% annually as of March 2010),25 there appears to be a strong case that CUMO is primarily providing services, not handouts. For more information on microfinance interest rates and how we calculate the cost of a loan to borrowers, see our microfinance glossary.

What is CUMO's repayment rate?

CUMO appears to have a fairly low repayment rate in recent quarters.26 CUMO calculates its repayment rate as 100% minus the portfolio at risk greater than 14 days ratio. CUMO told us that it does not reschedule loans.27 CUMO told us that decreases in the repayment rate have generally been due to crop failures and unexpected policy changes affecting farmers' ability to sell their products.28 CUMO also told us that it calculates the following collection/repayment rates:29 We have not seen these rates for other periods. For more information on collection rates and other forms of microfinance repayment rates, see our microfinance glossary.

What are CUMO's clients' standards of living?

According to a 2004 study based on a randomly-selected client sample,30 3% of CUMO's clients were "non-poor," 35% "upper poor," 50% "middle poor," and 13% "poorest."31 It is not clear to us how these categories compare to internationally-recognized poverty lines. CUMO describes the "middle poor" (50% of CUMO's clients) as:32
The middle poor have about 1.5 acres of land. They have some livestock, mainly chickens, and slightly better housing than the poorest, usually a rectangular thatched mud house. They have food for about eight months and this is often stocked in a small granary. They have better but few items of clothing. They also have more, but basic, household items like plates, pots and small chairs. The middle poor send their children to school albeit with poor clothing.
In 2009, the rating agency M-CRIL surveyed 138 new clients using the Progress Out of Poverty Index for Malawi.33 Based on this survey, M-CRIL estimated that 58.7% of new clients live on less than $2 per day at purchasing power parity.34 Other indicators of standard of living from the survey include: 85% of new clients use an unprotected water source, 69% have no furniture in their home, and 42% own a bicycle.35

Monitoring and evaluation

As discussed above, CUMO conducts annual surveys of drop out clients to determine why they have left the program. We have seen reports from 2003 and 2008, and the rating agency M-CRIL reports reviewing reports from 2005-2007. In addition, in 2009 CUMO commissioned the rating agency M-CRIL to conduct a detailed social performance assessment of CUMO, including evaluations of its focus on the poor, its client protection practices, and results of its satisfaction and drop out reasons surveys.36 CUMO has allowed us to post this assessment publicly.

Room for more funds

The chair of CUMO's board of directors told us that additional donations would be used to expand lending activities to additional areas of Malawi and to pilot new products.37 CUMO's CEO told us that such new products might include loans with longer repayment periods and support for social enterprises such as provision of safe drinking water.38 We do not know how much in additional donations CUMO could productively use for these projects in the next year. The rating agency M-CRIL, in its 2009 assessment of CUMO, noted that "CUMO is in the unique position of having surplus funds at its disposal."39 CUMO told us that it is not in need of funding for its established loan products, though its reserves are lower than they were at the time of the M-CRIL assessment.40

Remaining questions

Sources

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Source URL (retrieved on 05/25/2012 - 22:29): http://givewell.org/international/charities/CUMO