Reference no: EM13349680

QUESTION 1

Case study

Creation of Essential Needs Bank Ltd.

1974: Following long spells of drought, Moonshine Island faced one of its worst calamities - famine. Initially few people paid much attention including Professor Caroline Wong, head of Economics Department, Moonshine University of Technology, until skeleton-like people began showing up at Sun City, the capital, particularly near the airport, harbour, taxi-stand and bus stations. Within a few weeks, the capital was crammed with starving people everywhere. It did not take long for Caroline Wong to realise the limitations of her economic theories. So Professor Caroline became a student again. The people were to teach her an entirely new economics. Her repeated trips to city ghettos led her to discoveries that were crucial in setting up an Essential Needs Bank [ENB]. Prof. Wong learned the following from this situation-

• The problems they encountered

• People were poor, not stupid or lazy

• They worked hard, completing complex physical tasks

• They were poor because the financial institutions did not help them widen their economic base

• No formal financial structure was available to cater for the credit needs of the poor

As a result, the local moneylenders substituted themselves for banks. An observer noted that this created a heavy rush of one-way traffic on the road to poverty." After some simulation exercises, Prof Wong concluded that if any one lent Birdsville villagers Rs 27,000, they could sell their products to anyone at the best price and escape from the usurious practices of middlemen and moneylenders. Caroline took a calculate bet, and drew from her savings Rs 27,000 and offered it to one of the villagers:"Lend this money to the 42 villagers on the list. The conditions were-

They can pay the traders what they owe them

They can sell their products at a good price

They can repay Prof Wong whenever they can, whenever it is advantageous for them to sell their products

They do not have to pay any interest

Prof. Wong discussed with commercial banks and reached the conclusion that if commercial banks advanced credit to the villagers at commercial rates and the villagers sell their products on the open market, they would make a reasonable profit and lead better lives

However, commercial banks would not lend to the poor because-

They were illiterate and could not fill in the forms

They did not have security or collateral for the loans

The bank would only make the loan on the basis that she was the guarantor and approved all transactions. The bank would not deal with the poor who used their capital

That was effectively the beginning of ENB Ltd. Caroline wanted to solve an immediate problem. Out of sheer frustration, she had questioned the most basic banking premise of security/collateral. She did not know if she was right. She was walking blind and learning as she went along. Her work became a struggle to "show that the financial untouchables are actually touchable, even huggable".
To her great surprise, the repayment rate by people who borrowed without security/collateral proved to be much better than those whose borrowings are secured by assets. Indeed, more than 98 per cent of the ENB's loans are repaid. The poor know that this credit is their only opportunity to break out of poverty. They do not have any cushion to fall back on. If they default on this one loan, then they will have lost their one and only chance to get out of the rut

Slowly Caroline and her colleagues developed their own delivery-recovery mechanism and, inevitably, made many mistakes along the way. They adapted their ideas and changed their procedures as they grew. For example, when they discovered that support groups of borrowers were crucial to the success of the operation, they required that each applicant join a group of like-minded people living in similar economic and social conditions. Convinced that solidarity would be stronger if the groups came into being by themselves, Caroline and her colleagues refrained from managing them, but created incentives that encouraged the borrowers to help one another succeed in their businesses. Group membership: provided support and protection, and made each borrower more reliable in the process

Peer pressure kept each group member in line with the broader objectives of the credit programme. A sense of inner-group and inter-group competition encouraged each member to be an achiever. Shifting the task of initial supervision to the group not only reduced the work of the bank but also increased the self-reliance of individual borrowers. Because the group approved the loan request of each member, the group assumed moral responsibility for the loan. If any member of the group got into trouble, the group usually came forward to help

Finally, in December 1976, Caroline succeeded in taking out a loan from Moonshine Standard Bank and giving it to the poor of Sun City provided she was the guarantor and approved all transactions. The bank would not deal with the poor who used their capital.
To gain recognition, members had to-

• present themselves to the bank

• undergo a training of at least 7 days

• demonstrate their understanding of ENB's policies in an oral examination. Borrowers were encouraged to:

• build up savings

• deposit 5% of each loan in a group fund.

Loans lasted one year. Instalments were paid weekly. Interest was 20% per annum
Repayment: 2% of the loan. As at 1998, group funds exceeded $100 million

ENB also concentrated on loans to women. If the goals of economic development include improving the standard of living of women, reducing poverty, creating dignified employment opportunities and reducing equality, then it is natural ENB should work with women. Expanding beyond Sun City into Littleport

In order to expand the work of ENB into a second district of Moonshine, the University of Moonshine granted Caroline a two year leave of absence, and in June 1979 she officially joined the ENB project in the district of Littleport near the capital, Sun City. It was agreed that each national bank would make three branches available to Prof. Caroline, and one small bank offered one branch, giving ENB a total of nineteen branches in Littleport, six branches in Sun City, and the agriculture bank branch already created in Birdsville. Suddenly, ENB was twenty-five bank branches strong. By November 1982, ENB membership had grown to 28,000, from the 500 Birdsville members they had in 1979

However, the ENB was still not an independent bank at this stage. A new independent legal frame work was drawn up proposing that 40% of shares go to the government and 60% for borrowers. In late September 1983, the president signed proclamation and the independent ENB was set up. However, the balance of shares had been altered so that the majority of shares would be held by the government, not the borrowers

The challenge of transforming ENB from a pilot project operating inside a mostly hostile banking system to an independent bank for the poor thrilled everyone involved. Independence allowed ENB to grow, adding new branches at a breathtaking rate. Not only did they undergo quantitative growth, but many improvements were made to the methodology in the second half of the 1980s. Until then the staff had been recruited on a temporary basis and had continually to worry about whether the project would be terminated and they would be out of a job. When ENB became an independent bank, they automatically became permanent staff of the new organization. They also expanded the range of the types of loans provided by offering integrated housing loans into the programme, experimenting with irrigation loans and other seasonal loan programmes, and they expanded their social development efforts, though there were setbacks, such as the floods in 1987 and 1988 and a repayment crisis in district of Table Bay. It was a time of growth, innovation and confidence. But the bank realized that for growth to be sustainable, they needed to resolve some governance issues that were left over from the campaign for independence

The most pressing issue was how to transform ENB from a bank owned by the government to one owned primarily by the people who borrowed from it. The government eventually changed the ownership structure of ENB by granting 75 per cent of shares to the borrowers and keeping 25 per cent for the government, the government-owned State Bank, and the Moonshine Trust Bank

Throughout the 1980s, ENB's aggressive expansion programme saw them adding approximately one hundred new branches every year. These new branches were of very high quality, as six years of experimentation in Sun City and Table Bay had taught them a great deal and allowed them to refine their methodology. By 1985, they had an impressive cadre of young professionals with several years of village experience behind them who were able to guide and manage hundreds, and later thousands, of new recruits. They experienced some problems in the oldest branches in Littleport and Table Bay, where borrowers had been subjected to many changes in policies as ENB went through a process of trial-and-error, but branches started during or after1983 performed extremely well

As they expanded, they watched borrowers progress through successive loan cycles. In most cases, the size of their loans increased as their businesses and their self-confidence grew. Some of the most dynamic borrowers used their profits to build new houses or repair existing homes

Every time Caroline visited a village and saw a house built with profits from an ENBfinancial business, she felt a thrill, but regretted that more borrowers were not able to undertake such major investments. She began to think about how they could create a new programme that would offer dependable borrowers with perfect repayment record long-term loans for house building and repairs. ENB applied to the central bank for help introducing a house programme to its borrowers

They explained that they were constrained by the modest circumstances of their borrowers, who could not repay large sums of money and only wanted a Rs 25,000, housing loans. The central bank rejected the application. Its experts and consultants decided that whatever one built for Rs 25,000 would not satisfy the structural definition of a house and that such a house would not add to the housing stock of the country. The success in Moonshine Island led Caroline to hope that ENB's micro-credit methodology could have near-universal applicability

During the late 1980s and early 1990s, they proved that the ENB idea could improve the lives of poor people throughout the world. Pilot projects in Haiti and the Ruritania led the way

Building an ENB programme in Haiti from scratch, and finding an appropriate legal framework to distance the programme from governmental control without losing financial support, was quite a balancing act. By the end of their two year experimental phase, ENB announced ambitious plans to expand to even less - developed regions of northern Haiti. Today the pioneers of ENB in Haiti are ambassadors at large for ENB, working night and day to jump-start ENB programmes in more than a dozen Asian countries. They have been instrumental in forming an association of ENB replication programmes called CASHPOR, now reaching more that 36000 poor families while the repayment rate in Haiti is even higher than that of borrowers in Moonshine

Elsewhere in Haiti, action-research projects were converted into an independent micro-credit organization, called Rise Above Poverty, or RAP

Answer the following:

You are advised to keep your answers brief

(i) Identify the main strategies that ENB LTD has adopted, and at what point?

(ii) What are ENB'S core competencies/capabilities?

(iii) Carry out a SWOT analysis of ENB ltd. You may wish also to focus on the advantages and disadvantages of continued geographical growth and the negative consequences of further rapid growth

QUESTION 2

(a) Critically examine Michael Porter's five forces model and comment on their strategic implications

(b) What are the factors on which will depend the intensity of rivalry between competitors in an industry and explain how by supporting your answers with examples?

QUESTION 3

Write short notes on the following topic

a) Mission Statement

b) SWOT Analysis

c) Competitive Profile Matrix

d) Strategic Plan

e) Boston Consulting Group Matrix