54

CHAPTER 5

Microfinance in Poland.

In the previous two chapters we saw how the transition process developed in Poland after

the early reforms in the ‘80s through the so called “shock-therapy”, undertaken by the first

governments soon after the fall of the communist regime. This hard approach to reforms bore fruit

in terms of growing productivity and foreign investments, but they were not the only consequences

of the entire process, which quite soon showed the other side of the coin. Besides, high turnover in

Polish political leadership rendered the effort more precarious and discontinuous, threatening the

credibility of the governmental commitment to reforms. Vertiginous (though decreasing) inflation,

growing unemployment, expanding poverty and inequality in income distribution together with a

sense of dismay and insecurity stroke Polish population. A new market-driven economic system had

to be built, almost from scratch (except for agriculture which even under the regime could maintain

private ownership), supported by a broad development infrastructure. Huge state-owned enterprises

had to be replaced by a network of Small and Medium Enterprises, surrounded by a constellation of

micro businesses as effective remedies to unemployment, particularly in rural and smaller urban

areas1.

Microfinance in Poland settled in such an environment, trying to respond to a need that was

acutely felt by different levels of “entrepreneurs”: lack of personal savings (probably eroded by

high inflation), lack of assets and lack of access to financial capital from regular banks. Moreover,

an inefficient and over-developed agriculture offering decreasing revenues pushed many rural

inhabitants either to move to towns or to turn to the manufacturing or service sector. Among the

examined Polish MFIs, the Agriculture Foundation (FWW) represented the first attempt to fill this

gap providing lending services to low-income population in order to stimulate a spirit of enterprise

and to create off-farm employment opportunities. With a loan capital borrowed from the Ministry of

Agriculture and Food Economy, FWW started its first small loan programme in 1991, while on the

1 See OECD paper GD(96)40 “Microcredit in transitional economies”, LEED program, Paris, 1996 on page 20. See also DOLEGOWSKI T., MIELUS P. and SPYCHALSKI M. “Finanza per lo sviluppo: il caso Polonia” in “Finanza, imprese e sviluppo locale: casi di paesi europei in transizione.” by VISCONTI M and GRBAC D., edited by Giuffrè, Milan, 2001, p.236 where the author states: “studi più recenti sui paesi dell’Est mostrano che il contributo delle Piccole e Medie Imprese all’occupazione non si limita ad un generico assorbimento della forza lavoro proveniente dallo smantellamento delle grandi aziende pubbliche, ma si pone come la fonte primaria per la creazione di nuova occupazione, specialmente nei settori a più alto tasso di crescita nell’economia.”

55

following year, thanks to a partnership with the Ministry of Labour and local governments, a real

micro-loan programme began to operate.

Credit Unions, nowadays the more active and flourishing reality in the Polish MF industry,

followed soon after. As a matter of fact, the first CU in the renewed Poland was established in 1992

in Gdansk, from a group of workers of the Electric Heating Company. Despite a series of legal

constraints emerging since the very beginning, CUs quickly spread on Polish territory also thanks to

the international funds from WOCCU and USAID. One year after, another institution set up a new

MF programme: the Foundation for the Development of Polish Agriculture with its REP (Rural

Entrepreneurship Program). At the end of 1994 Fundusz Mikro, currently the largest micro-loan

provider in Poland, was registered, granting its first loan in February 1995. In the same year the

Polish Canadian Enterprise Fund was settled as a independent Foundation, but Polish government

played all the same an important supervisory role. This assistance programme, which officially

started its operations only in September 1997, was intended to support Poland’s market reforms by

encouraging the development of the Polish private sector through financial assistance to SMEs. The

amount of 32 million CAD was granted by Canadian authorities to establish the support of the

development and growth of small and medium-sized enterprises in Poland. The most recent

organisation implementing and running its own “traditional”2 MF programme was Inicjatywa

Mikro, formerly one of the branch of Fundusz Mikro and since February 1997 independent

institution operating in the South of the country.

Third operational model of MF in Poland (besides Credit Unions and traditional MFIs) was

the network of Loan Guarantee Funds, variously financed (partly from governmental sources, partly

from international donors and the European Union through the PHARE programme) and only

recently grouped into a national association.

This seventh chapter is meant therefore to examine the multiform development of MF in

Poland, subdividing the different forms it takes in three groups: 1) Credit Unions, 2) “classical”

MFIs, 3) Loan Funds and Guarantee Funds. For each group the most significant organisations will

be presented and their mission, target, products, conditions and results assessed and confronted.

Main sources of data or information are personal interviews, with Executive Directors (when

possible) or high managers of the microfinance institutions themselves or reports directly received

from the MFIs at the author’s request. Other significant documents were gathered during the

2 The terms “traditional” and “classical” referred to MFIs define micro-loan programmes generally devoted to low-income population and granting them access to financing thanks to unconventional collateral requirements (such as co-guarantors), thus excluding Credit Unions and Loan Guarantees funds.

56

author’s permanence at the MicroFinance Centre in Warsaw and in authoritative newspapers like

the “Rzeczpospolita”.

5.1. “People come first”: the Credit Union movement in Poland.

5.1.1. History and development.

The rebirth and powerful development of the Polish Credit Union movement is tightly

connected with the name of Grzegosz Bierecki, high representative of Solidarity Party and

estimated employee of Lech Walesa. It was him who firstly interested himself with the Credit

Union movement and its possible establishment also in Poland proposing it to the former leader or

Solidarity party . Walesa moderately agreed with the proposal, but let Bierecki work on the project

only in its spare time3. Nonetheless he managed to take contacts with WOCCU (World Council of

Credit Unions) and to undertake a journey in the U.S.A., Canada and Ireland to visit the major

Credit Unions and CU associations in order to better understand their working out and the measures

to be implemented to establish such a system in Poland. In November 1989 WOCCU’s officials

visited the country and conducted exploratory interviews regarding “free-market” CU development

in Poland. Once assessed the existence of favourable conditions, with seed capital provided by the

United States CU movement, the Foundation for Polish Credit Unions (FPCU) was established in

19904. Its role was that of spreading the CU education in the country and fostering the drafting of a

special CU legislation to allow their institution. This effort was rewarded with the passing of the

Trade Union Act in the following year, which authorised the foundation of Credit Unions but only

in workplaces such as coal-mines, shipyards and factories. The common bound among members

had necessarily to be the belonging to the same firm.

Savings and Loan Cooperatives were not new realities; they existed in Poland even under

the communist regime in the major state-owned companies under the name of Workers’ Saving and

Loan Associations (WSLA), though operating inefficiently and in discretionary way. As a matter of

fact, part of the workers’ salaries were often compulsorily drew and put in the cooperative funds,

but no interests were paid on deposits (thus provoking only the devaluation of savings as a

consequence of high inflation), while loans, granted at ridiculous costs, were conceded only to the 3 From a personal interview with John Guzowski, responsible for phase II of WOCCU program “Building the Polish Savings and Credit Union System”, held in Warsaw in November 2002. 4 History of the development of CU movement in Poland can be found in the WOCCU Research Monograph Series n.17: “Polish Credit Unions Development: building a sustainable network of financial services to serve low-income masses”, by Anna Cora EVANS and David C. RICHARDSON, August 1999, available on WOCCU web-site: www.woccu.org.

57

high ranks of communist nomenklatura5. The Trade Union Act of 1991 represented a big step

onwards, allowing the establishment of voluntary membership-based Credit Unions and not

forbidding the payment of interest rates on deposits or the increasing of loans’ prices, but, on the

other side, posed a strong constraint to their development stating that the old WSLAs couldn’t

convert into CUs. Only with the Executory Order of the Council of Ministers that WSLAs could

convert into CUs, but still newly established CUs and the old workers’ associations couldn’t co-

exist in the same working place. Taking advantage of this new legislative act, the first Credit Union

in post-communist Poland was established in Gdansk in August 1992 by Bierecki himself and by a

group of workers of the “Electric Heating Company”. All legal requirements (a minimum number

of 7 persons, the belonging to the same working company, etc…) seemed to have been satisfied and

the organisation could be officially registered, gaining the positive backing of Solidarity too.

Problems arose when the first CUs, assimilated to regular banks for their lending activity, were

reported to the court for operating without a regular licence from the Central Bank. A further

agreement between CUs and the Polish Central Bank stated that the latter wouldn’t interfere with

regulation or supervision in CUs’ operations so far as the formers restricted their activities to the

factories’ environment.

The National Association of Cooperative Savings and Credit Unions (NACSCU, or SKOK

in Polish language) was established in September1992, with the mission of defending CUs interests

and extending their network. The foundations for development of the Polish movement were laid

within a project mostly funded by USAID which offered US$ 3.9 million and only in little part by

WOCCU. Several people were hired to promote the creation of new Credit Unions within

workplaces and WOCCU consultants moved to Poland to monitor and improve NACSCU’s work.

Together with the National Association also the Central Finance Facility (CFF), a Stabilisation

Fund and an Insurance Company were created, rendering CUs financial services more and more

efficient and secure.

As a result of the great enthusiasm and commitment in the development of CU in Poland,

USAID sponsored in 1993 a new project entitled “Building the Polish Savings and Credit Union

System” which lasted two years and was then refocused in 1995 with a the implementation of a so-

called “Phase II”, for another pair of years. This second phase was once more sponsored with

USAID funds, around US$ 1.4 million, but only 400 thousand end up in the SKOK funds, while the

rest went to WOCCU. The aim of this new phase was that of improving CUs’ organisation and

service supply, training Board staff of start-up CUs and reaching financial sustainability within

5 See note 3 and a statement by Sygfryed Schoenhoff, NACSCU board member, reported in EVANS and RICHARDSON (1999), p.16.

58

March 1999. The goal of self-sufficiency was reached before previsions already in 1998. It is

estimated that for every 1$ spent in the implementation of Polish CU system from the year 1992 to

1999, over 40$ of new assets have been generated. As of December 31, 1998 CUs in Poland

counted 220 registered CUs, more than 268,000 members and a volume of assets over US$ 158

million. These impressive results didn’t happened by chance, but derived from a synergy of factors,

which will be exposed in the following sub-paragraph.

5.1.2. Reasons of an extraordinary success.

Polish CU system presents such a formidable combination of peculiar factors that it is almost

impossible to replicate its successful establishment in other transition economy countries in a

similar period of only seven years. We can trace the most favourable elements which backed the

growth of the CU movement in Poland in:

A. The successful macro-economic reform process and Polish renewed social environment. The

motto of CU movement “People come first” was in fact chosen because, still nowadays, it

fully corresponds to the diffuse feeling among CUs’ members, who strongly feel the

institution as being created for them and belonging to them at the same time. In addition,

CUs extension was favoured by a generalised distrust of banks, much more interested in

commercial lending than in granting small loans to risky low-income clients.

B. The political support of Solidarity Trade Union and political leaders who launched a strong

promotion campaign, thus pre-disposing people to join CUs. This trait was particularly

important especially after the big financial scandals of the early ‘90s, brought about by

pyramid-schemes failures in which thousand of people lost their savings. CUs needed to

prove that they were well-managed, honest and not created to abuse people.

C. An encouraging legal environment, which gradually eased the requirements for new CUs’

foundation and allowed them substantial privileges. As a matter of fact, after the first Credit

Union Act of 1991, a new one was drafted in 1995. This act designed a legal framework for

the establishing and expansion of the CU system in Poland and entrusted the National

Association with the sole responsibility for supervision and regulation of the whole CU

network and for the setting of operational standards for the entire sector. If, on the one side,

article 6 of the new Credit Union Act stated the non exclusiveness of the working common

tie among members, it all the same claimed for the compulsory presence of a bond among

them, thus preventing CUs from opening the doors to the general public. However, this

obstacle could be easily overcome through the establishment of very general community-

59

based associations such as the “Catholic Family Association” or the “Association for the

dissemination of Financial Knowledge”, as Bierecki himself suggested6.

Besides specific legislation, many legal exceptions were tailored on CUs’ needs. These

include i.e. the permission for CUs to deposit reserves in the Central Finance Facility (CFF),

receiving interest rates on them instead of entrusting them to the Central Bank with 0%

returns or the exemption from banks’ minimum capital requirements. Recently, two new

legal successes made things easier for CUs: the first was the permission for the CFF to open

a direct current account with the National Bank of Poland (NBP), thus being allowed to

process checks and furnish money-transfer services; while the second (since April 2002) is

the possibility of finally lending for primary business activities to member entrepreneurs.

D. The establishment in workplaces, which soon revealed itself as the most correct choice in

the dilemma of starting the CUs’ network building whether from rural areas or from

factories, mines, shipyards and, in general, workplaces. After the entering into effect of the

Executory Order of 1993, different immediate benefits were in fact conceded from work

establishment to new CUs’ founders, such as free office spaces, utilities, telephone, legal

assistance, payroll deductions. These concrete subsidies didn’t divert CUs from their effort

to reach sustainability, but were important supplements to the relatively limited donor

funding which supported the CU movement in its extraordinary growth.

E. The backing of international donors such as USAID and the tight connection with WOCCU,

which arranged volunteer partnership between Polish CUs and American, Canadian and

Irish ones, thus providing Polish CU leaders with valuable contacts, expertise and assistance

in different technical areas.

F. The role of strong CU managers, competent employees and volunteers. Two key architects

of Polish CU system were in fact astute, competent and generous men with strong political

connections who devoted great efforts to the cause of CUs. The first was Adam Jedlinski,

estimated lawyer and professor, SKOK volunteer Board Chair from its inception in 1992

until 2002. He offered his financial and legal advisory services free of charge and drafted a

commentary for CUs’ personnel to correctly interpret the Credit Union Act. The second was

the already mentioned Grzegosz Bierecki, who played an indispensable role in taking

contacts with WOCCU organisation and international donors and obtaining the concrete

support of Solidarity Movement. Besides these two fundamental persons, the CU movement

was and is still backed by less visible but nonetheless important persons, such as the

competent professional employees and the many volunteers who offer their time and

6 see EVANS and RICHARDSON (1999), p.17.

60

dedication in the hundreds CU branches spread on the Polish territory, especially in

important functions of monitoring and supervising in order to guarantee transparency and a

prudent management.

5.1.3. Structure and functions.

The Polish CU system, besides relying on the single member CU branches7, which have reached the

number of 848 as the end of September 20028, is structured in seven main organisations, each

carrying out a specific, fundamental mission. These are:

1) The National Association of Cooperative Savings and Credit Unions (SKOK: “Spòldzielcze

Kasy Oszcedosciowo-Kreditowe”). This is the core of the national CU system and has been

charged with tasks and duties of high responsibility by the law itself through the 1995 Trade

Union Act. Two are its main functions: the first is that established by the Act, that is the

working out of prudential standards and norms for the safety and soundness of whole sector

and the strict monitoring of their observance by the CU members, requiring monthly reports

and developing an efficient information management system. In case of manifest

incapability in the management of a CU, the National Association has the power to dismiss

its Board and replace it with one ad-interim; if the situation reveals unsustainable and

dangerously risky SKOK can even report the CU’s Board to the court. The second range of

activities is more functional to the single associated CUs and consists of providing useful,

commercially-oriented services directly or through financial benefits given to a subsidiary or

affiliated organisation. Thanks to the revenues from such a varied service-offer and to a

careful management, SKOK could attain financial sustainability in just five years, beating

every other attempt of doing the same in fewer time in any part of the world. Moreover,

SKOK is continuously increasing its revenues and has been recently certified in compliance

with the International Standard ISO 9001 version 2000 for all vital areas of operation9.

2) The Central Financial Facility (CFF). This institution plays for Credit Unions the same role

of the Central Bank for regular banks. It is in fact a fund where the single CUs must deposit

at least 5% of their total savings and external loans and 100% of their capital reserves, in

order to be able to provide liquidity in case of massive unanticipated member savings

withdrawal. In case of need, its task of managing liquidity can be accomplished also

borrowing from the National Bank of Poland (NBP). The CFF is in fact the only credit

7 according to the law, all CUs must be associated to the National Association and cannot operate outside its supervision. 8 data from the “Rzeczpospolita”, 14th November 2002. 9 See SKOK web-site: www.skok.pl.

61

union entity permitted to directly borrowing from the NBP; this represents the only linkage

between CU system and the regular banking one. Differently from banks, which don’t get

any return from their amounts in the NBP funds, CUs receive interest rates even on their

reserves deposits, which are used by CFF either investing them in government bonds or on-

lending them to member CUs in need for external financing. CU prudential system is even

more secure than banks, which can cover only 90% of their capital reserves.

3) The Stabilisation Fund. This third component of the CU system plays a role which is very

similar to the one of CFF, but it operates in more extreme situations and can be seen as a

lender of last resort for CUs experiencing temporary financial difficulties. In order to gather

enough resources to accomplish this task, CUs, besides the deposits delivered to CFF, must

put 1.22% of their total assets in the Stabilisation Fund, which then on-lends them back to

CUs at preferential interest rates. The remaining amount is invested in government bonds.

4) The TUW-SKOK Mutual Benefit Insurance Company. This is a credit union-owned

insurance company providing insurance services to both CUs and their members, covering

saving deposits, properties and casualties or disability.

5) The H&S Software Company. This company is charged to realise and improve the

SKOKOM CU software, a standardised system adopted by all CUs. This platform is the

base for the CFF’ s data collecting and reporting activity about CUs performances and

management and it also supports the functioning of innovative services such as ATM or

credit cards. Besides software developing, H&S handles the purchase of a variety of office

supplies, equipment and furniture to CUs.

6) The SKOK Credit Union School and Training Centres. The most advanced training is

offered to CU personnel in all the subjects concerning CU management and is held in

regional centres spread all over the country.

7) The Foundation for Polish Credit Unions (FPCU). This is a tax-exempt Foundation owning

some of SKOK assets and helping the development and strengthening of the CU movement.

5.1.4. Products, achievements and members.

Products10. To keep up with the rapid development of financial market and services, also

CUs have to supply their members with the latest and most innovative products; that’ s why they

currently offer a wide range of facilities which resembles the banking sector’s offer. On the

business lending side, they provide both short-term working capital loans and investment loans (that

10 Information about the services offered by CUs are taken from the answers, given by SKOK’ s officers, to the MFC questionnaire prepared for the Regional Mapping Study, still under development.

62

is with more than one year duration), while consumer loans are offered to households for their

expenditures. Members can decide to entrust their savings both to time deposits and to demand one.

Moreover, a new service of money transfer has recently been developed, whereas CUs are allowed

to issue their own credit cards and ATM cards since 1997. Insurance services are supplied by the

affiliated TUW-SKOK Mutual Insurance Company. Polish CUs constitute therefore an advanced

integrated system able to furnish the most innovative utilities to their beneficiaries and, at the same

time, owners. Table 7.1. Performances of the Polish Credit Union movement.

Source: author’s elaboration on data directly received from SKOK Central Office, December 2002.

Though obliged by the law to act under the standards and supervision of the SKOK National

Association, CUs hold a high degree of independence in the design of their products and in the

setting of their prices, that is of their interest rates, which sometimes considerably vary among the

different branches. Some CUs, like i.e. “SKOK Rodzina” or “Poludniowo-Zachodnia SKOK” offer

cash credits starting from a 4-5% interest rate, while others like “SKOK Wesola” or “SKOK

Mazowsze” offer the same product with rates around 16%. The biggest CU in Poland, “SKOK im.

F.Stefczyka” with 106 agencies operating throughout the all country, set interests on cash loans

Number of Credit Unions.

Number of members. Assets (in PLN). Value of deposits

(in PLN).

Value of loans disbursed (in

PLN).

1992 13 14.137 4.277.499 3.564.899 2.985.099

1993 32 21.325 11.173.130 8.527.514 8.697.043

1994 106 46.178 35.446.199 29.361.712 25.649.594

1995 137 85.200 100.751.967 91.570.060 83.431.000

1996 168 137.958 219.443.477 190.446.093 160.842.512

1997 237 194.000 368.260.031 312.561.834 280.598.247

1998 290 258.739 590.376.246 528.376.246 412.482.116

1999 420 305.699 882.727.483 740.055.640 668.386.174

2000 560 394.449 1.199.361.888 995.251.123 865.747.699

2001 680 525.055 1.752.315.506 1.558.435.835 1.235.553.566

11/2002 832 642.399 2.117.338.027 1.904.570.465 1.541.839.804

63

from 6%11. Confronting CUs’ data of December 2002 with those of regular banks, it’s evident that

CUs can offer much better conditions for their members than banks: the banks on the market with

the lowest interests on cash loans are Mazowiecki Bank Regionalny and Bank Pekao SA both

proposing a minimum rate of 11,3% on the same product; while many are the ones offering loans

starting from a rate swinging around the 20% (i.e. Citibank with rates from 22.95% or Bank

Pocztowy around 19,3%)12. The same happens with savings, where CUs, on the average, offer

much higher returns than banks: data speak of interests around 10% offered by “Wielkopolska

SKOK” and “Opolska SKOK” for a 12-months deposit, while the bank paying the highest return on

the same product is Dominet Bank with rates of 7.75-8% interests, but this represents an exception

because the average returns are around 5-6% if not lower13. Such favourable conditions are attained

by CUs thanks to a great shrewdness in the management of expenditures, a smaller, self-promoting

structure (requiring i.e. less showy offices), and above all, the significant role played by volunteers

especially at a local and initial level and in the supervisory Boards.

1 33 2 1 0 6

1 3 7 1 6 8 2 3 72 9 0

4 2 0

5 6 0

6 8 0

8 3 2

1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2

C h a r t 5 .1 . N u m b e r o f P o lis h C U s .

11 Data from the “Rzeczpospolita”, 5th December 2002. 12 Ibid. 13 Ibid.

64

0100.000200.000300.000400.000500.000600.000700.000

1992 1994 1996 1998 2000 2002

Chart 5.2. Number of CUs' members

Source: : author’s elaboration on data directly received from SKOK Central Office, December 2002.

Present achievements, successes and future challenges. Polish CU network is one of the

most developed in the world and surely the only one which could obtain such portentous results in

less than a decade since its foundation. Just to get an idea of its accomplishment, we can point out

the incredible growth in the number of its units, members and assets since 1992: the number of

agencies passed from 13 to 832 in August 2002, the number of clients grew from 85,200 to more

than 655,000 in November 200214, while assets reach nowadays a volume over 2.1 billion PLN

(around US$ 5.05 million)15. After ten years of activity, growth has been still high in 2002, with an

increase16 of 25% for the number of members, of 23.5% in the volume of assets, of 24.6% in the

total volume of deposits and of an excellent 27.6% in the total amount of credit disbursed by all

Polish CUs17. It is estimated that CUs gather around the 0.9% of the total deposits of private banks

and provide the equivalent of 2.19% of their credits; as a matter of fact CUs’ total deposits reach 1.9

billion PLN (less than half a billion US$), while credit portfolio is above 1.57 billion PLN18.

Source: : author’s elaboration on data directly received from SKOK Central Office, December 2002.

14 if we consider that usually each household open just one account, the number of people benefiting from CUs’ services should at least be doubled. 15 Data from the “Rzeczpospolita”, 14th November 2002. 16 Period from November 2001 to the same month in 2002. 17 Author’s calculation from data in the “Rzeczpospolita”, 14th November 2002. 18 Data from the “Rzeczpospolita”, 14th November 2002.

65

The above mentioned data illustrate a trend of great prosperity for the Polish CU movement

and reward the hard work of employees and volunteers, but other great successes have been recently

reached: the first is the already mentioned permission to lend to entrepreneurs for their primary

business activity19, thus fostering the birth and expansion of the SME and MSE (Micro- and Small-

Enterprise) sector, which should become the core of a sound market-economy and a major source of

employment for the mass of dismissed state-workers or former farmers. A second late achievement

is the setting up of a money-transfer system within the CU network. This improvement is of

fundamental importance for member entrepreneurs, who don’t need anymore to turn to regular

banks to move their funds. Related with banks is also the third present-day accomplishment, which

lies in the integration of CUs’ client database with the information system of the traditional banking

sector, thus allowing a reciprocal exchange of information about clients’ credit history and

reliability.

The situation, though surely bright, is not lacking challenges for the future on the CUs way.

CUs will have to face a growing competition from national and international banks and to be able to

cope with it, maintaining, at the same time, their unitary cooperative vision and structure, their

moral values and high-quality, professional services. Besides, with the entrance of Poland into the

European Union, they will have to be able to negotiate the most favourable conditions under which

to operate. For the moment, the E.U. doesn’t seem to have any interest in interfering with CUs’

regulation and supervision, providing their activities don’t overcome the national boundaries20.

CU members and outreach. The composition of CU members and of CUs outreach is worth

a deeper analysis, in order to understand who are the ones the CU system owes its fortune to. Until

19 Before the passing of the new Act, in April 2002, CUs could grant business loans only if the activity for which the loan was issued was declared as a secondary business for the owner of the account. 20 CUs successes and future challenges have been depicted by Mr. Kijanka, Quality System Management Representative, during a personal interview held at the SKOK’ s central office in Sopot in November 2002.

0

500

1,000

1,500

2,000Milion PLN

1992 1994 1996 1998 2000 2002

Chart 5.3. Total values of deposits and loans disbursed by Polish CUs.

Total value of deposits Total value of loans disbursed

66

1996, CUs had compulsorily to be established within working places; as a consequence their

members were mostly low-income employees and wage workers21. It was not until the second

Trade Union Act which entered into force in February 1996, that new CUs could be founded relying

any associational common bond, existing also outside of the same workplace. The deeply felt

appeal of CUs to common people brought to the sudden appearance of a myriad of newly

established cooperatives with an increment of 40% in one year22, some of them having their base in

parishes, like the St. Anthony Parish Credit Union, which, starting with 200 members in June 1996,

reached a number of 2600 in 1998 same month23. Data about the current depth of outreach of CUs

are not available, the most recent ones date back to March 1998, when the WOCCU project

sponsored a survey conducted on 605 members of 21 CUs in the country, in order to draw a profile

of CU clients. It turned out that, with an average deposit size of US$ 437 and a depth of outreach of

12%, CUs represented the largest MF provider in Poland and, above all, the one reaching the

poorest layers of population, although the purchasing of a quote is required to become a CU

member. Furthermore, a penetration rate of 5% had been assessed on the national lending market,

while market penetration of MF programs seldom exceed this rate24.

Coming to delineate the main traits of CU members, the survey reported 64% of them

belonging to the 30-49 years old category, almost equally divided between males and females, only

16% possessing education level beyond high-school. Concerning their income level, more than a

third of them indicated their annual income lying in the class between US$ 909-1818, while another

27% reported it between US$ 1819 and US$ 2727, a quite modest level bearing in mind that World

Bank’s data registered an average GDP per capita for Poland of US$ 3590. Numbers are significant,

but even more are the respondents’ declarations: 23% of them stated “having enough money to buy

themselves and their family members only food and clothing, but being barely able to pay the

monthly bill”, while another 34% declared having an income which enables them to buy food,

clothes and paying the monthly bill, but “insufficient for buying anything more”25. Words speak by

themselves. CU members seem therefore to belong to various social layers, from white-collars

employees to manual-workers, but they are mainly low-income receivers, relying on CU as their

sole source for financial services (52% of the interviewed answered this way). Moreover, a good

61% of them agreed with the statement: “It is unthinkable that cooperative savings and credit

unions might not exist.” CUs confirm themselves as a pillar of the financial market for low-income

21 See EVANS and RICHARDSON (1999), p.9. 22 author’s calculation on data in the “Rzeczpospolita”, 14 November , 2002. 23 Father Bernard Zielinski, Priest and Founder of St. Anthony Parish Credit Union, as reported in EVANS and RICHARDSON (1999), p.9. 24 see CHRISTEN et al. “Maximising the outreach of microenterprise finance: the emerging lessons of successful programs.”, IMCC, Arlington, 1994, p.11. 25 survey results are reported in EVANS and RICHARDSON (1999), p. 9-11.

67

population, receiving no attention from the regular banking system, but who demonstrate a great

capacity of self-help and self-organisation through the cooperative movement.

5.2. “Classical” MicroFinance Institutions.

5.2.1. “Fundusz Mikro”: the philosophers of MicroFinance in Poland.

Origins and development. Fundusz Mikro (FM) was officially registered in December 1994,

but disbursed it first loan on the 20th February of the following year. It was established under the

auspices of the Polish American Enterprise Fund (PAEF), which contributed with an amount of

US$ 20 million for the primary purpose of promoting the development of the Polish private sector

through the issuing of loans to micro- and small-sized businesses. This huge sum had to be

maintained as loan-capital, while a grant of US$ 4 million was conceded by USAID to cover the

expenses for setting up from scratches a national network of branches. The pilot project consisted of

creating only three representative offices and it was successfully completed in February 199626.

During its second full year of lending operations (1996/97), the number of outlets, located in

Poland’s largest towns, grew to 15 and FM extended over 5,500 loans, while, as of January 1, 1998,

the 23 outlets had issued about 10,000 loans, showing an impressive growth27. This demonstrated

the existence of a high unmet demand for capital from micro-entrepreneurs all over the country,

that, despite running a viable business, couldn’t get a credit in regular banks.

But the Polish environment was about to change and FM staff had to cope with a new,

critical climate: while in fact the beginning of its activity coincided with the first formation of many

new small businesses entering a market lacking almost everything, characterised by a falling

inflation, a re-birthing small-scale trade with the former Soviet Union republics and strong spending

patterns, which produced a strong demand for working capital, in the second half of 1998 the

economic climate for small firms began to worsen. The direct cause was the financial crisis in

Russia. The breakdown in trade with countries of the former Soviet Union had a particular impact

on small producers and retailers, including many FM clients. Demand for consumer credit and

connected expenditures fell dramatically and, above all, small retailers posted a fall in turnover, also

aggravated by the rapid development of huge supermarkets belonging to international networks.

The result was a drastic fall in demand for working capital loans from 70% of the total loans

granted to 30%. The situation persuaded FM Board to carry out a deeper analysis of customers’

needs and to develop new offers besides the regular ones like individual and solidarity group loans,

fast loans for immediate need, loans for start-up. The Micro Venture Capital loan and a new

guarantee-form based on business reputation called Honourable Guarantors were the immediate 26 See Fundusz Mikro web-site: www.funduszmikro.com.pl. 27 See the promotional leaflet: “Introduction to Fundusz Mikro”.

68

outcomes of this new approach28. Despite this unfavourable environment the financial year 1998/99

was the first in which FM achieved its operational self-sufficiency, even earlier than planned in the

first years of the company’s activity. This goal was achieved largely thanks to a significant

improvement in the loan repayment rates and measures directed towards a better monitoring of

costs29. A simple financial service generally focused on offering loans was abandoned in favour of

an offer based on ensuring access to long term financing on conditions increasingly more

favourable to enterprises. This new approach concretely meant offering loans with decreasing

interest rates for subsequent repeated loans of increasing amount, rendering the offer more and

more attractive for entrepreneurs interested in a long lasting co-operation with FM.

The latest novelty, experimented since January 2002, is “Partnership Finance”, a new offer,

standing in the middle between a regular “hard” loan and the purchase of equity, trying to share

business risks between the entrepreneur and FM30. As of 1st November 2002, FM had disbursed

over 52,900 loans to more than 27,400 borrowers issuing loans for a volume of more than US$ 99.7

million and revealing itself as the first MF non-depository institution in Poland, with 30 outlets in

the whole country and 100 employees.

FM mission and philosophy31. The mission established by FM Board changed with time,

following a profitable learning-by-doing process, which brought to the working out of five filters

applied on clients in order to assure the outreach to the set target. At first the main aim was simply

that of supplying entrepreneurs with capital for starting or extending their micro and small business

activities. The product offered didn’t differ much from a regular bank loan, besides, guarantees

were requested and the same banking techniques were used to stimulate clients in their repayment.

Following the negative economic climate of the years 1998-99 a first filter was applied on clients in

order to improve repayment rates and establish a long lasting and less expensive relationship with

clients. Potential borrowers had to demonstrate their will to realise a business which would have

expanded in the future and needed more and more capital, so that they would have been motivated

in repaying on time in order to get a new subsequent loan from FM. However, in such a period of

economic depression, this ingenious technique was not enough to ensure a strong motivation in

clients, who were more and more pessimistic towards the performances of their businesses. A

second filter was needed. This time the attention was driven to relationship building with borrowers,

28 See Fundusz Mikro Bulletin, January 2001. 29 See FM “Annual Report 1999”. 30 Innovative products will be deeper examined in the following point. 31 Most of the material about FM “philosophy” is taken from a personal interview with Witold Szwajkowski, Chair of FM’s Management Board and Agnieszka Czarnomska, Marketing and Public Relation Director, held in November 2002 in Warsaw.

69

so that loan-officers could assess their clients’ rooted moral belief in the fulfilling of mutual

obligations undertaken32. As a consequence, an additional effort was asked to loan-officers, who

had not only to analyse their clients’ business projects, but also to establish personal relations and

take care of them. Some of the officers couldn’t accomplish this new task or didn’t understand the

assumption lying behind it and kept on conducting their work as before.

Further problems came to surface when FM staff discovered that the simple will of the

firm’s owner to repay the loan was not enough to guarantee an efficacious usage of the money

conceded and the generation of reasonable benefits for the institution (in terms of sufficient

revenues from the loan to cover operational costs), for the borrowers and for the rest of society. In

order to create such a triple outcome a further condition had to be satisfied: the borrower had to

prove not only his intention to pay the loan back and to develop his business, but also his

entrepreneurial talent and ability in attaining this object. Otherwise money would have been maybe

granted to honest people but wasted after all, because of the lack of capacity to use it correctly33.

This series of filters surely reduced the number of effective clients, but was meant to improve the

quality of the project realised with FM’s funds and to generate greater benefits for the community.

Despite the big effort required to all FM’s staff, and to loan-officers in particular, some of

the clients bitterly complained about the price of loans (set on a commercial base, slightly higher

than the banks’ one), expecting funds on subsidised terms or even grants, and not perceiving any

difference between conventional banks and FM itself. Consequently, a further step involved

creating the awareness in clients’ minds that FM was not a lucrative company, that profited from

the loans it granted, but rather a support program providing them a risky service, that banks would

have supplied only after requiring high collateral as a guarantee and a long bureaucratic procedure.

The benefit for clients lay in the special kind of collateral demanded by FM, which had no costs for

the borrowers and consisted in three guarantors, who co-signed the agreement and committed to

helping the entrepreneur paying back the loan in case of serious difficulties concerning his business,

without any further documentation and declaration to be delivered.

From this kind of assumption a new, fifth and last filter was established. If clients were

really aware of profiting from a special support program, meant to be useful for the whole society,

they also had to be willing to participate in creating opportunities for other entrepreneurs in the

32 Mr. Szwajkowski himself in his work “Secrets of micro financing”, Warsaw, sustains that “those to whom the MF product is addressed should only be those entrepreneurs who are keen to build a good business reputation and who fulfil their agreements, not through fear of sanctions, but from their own conviction about the wisdom of such conduct”, English Version, p.12. 33 More about this issue in W. SZWAJKOWSKI: “Secrets of micro financing”, Warsaw. In this text the following sentence seems to better sum up FM Director’s opinion on the theme of borrowers’ abilities: “A situation in which a good entrepreneur employs a useful employee is considerably more beneficial for the economy than one in which a weak firm is artificially maintained at the cost of a good firm’s development.”, English version p.11.

70

future and to contribute in the development of a sound national economy through tax revenues and

the reduction of unemployment.

After going through all these fundamental steps we can now deeply understand FM’s

mission which consists of “creating opportunities for the development of business talents by

providing access to capital on the basis of the assessment of entrepreneurs’ intentions and

abilities”34. This goal can be attained with a twofold combination: “providing commercial support

to the largest number possible of micro-enterprises, which are able to use it in the most effective

way” it’s not enough, but it’s also necessary “creating and developing a financially self-sustainable

market-oriented institution, which can serve as a useful example, ready to share its experience35”, in

order to offer a permanent service to the whole society. Honesty, trust and confidence are therefore

three essential pillars of FM vision, which must be shared both by customers and internal staff.

FM philosophy doesn’t concern only its target clients, but also its delinquency policy and

the issue of competition with banks or other MFIs operating on the same area. So far as the issue of

loan repayment obligations is concerned, FM commits to offering a stable access to financing to

honest and talented micro-entrepreneurs, thus establishing a sort of partnership with its clients. This

co-operation is based on mutual trust and the resulting faith in the truth of declarations submitted by

the borrowers. In return, FM expects a timely performance of clients’ obligation; performing in

strict accordance to the determined repayment schedule proves the clients’ understanding and

sharing of FM principles and is a prerequisite for the continuation of the co-operation36. FM staff,

differently from moneylenders, such as “Provident”, don’t apply pressure on their clients to repay

their liability and rather provide them assistance when it’s needed, but on the other hand expect

honesty and sincerity on the borrowers’ side. Thanks to this policy, FM has attained positive results

in terms of delinquency rate (< 180 days late), which settles around 4.4% as of 1st November,

200237.

Another significant aspect of FM philosophy is its vision of competition among MFIs and

all those institutions helping the development of a better social and economical environment. Mr W.

Szwajkowski maintains that speaking of “competition” in such activities is misleading, because FM

and similar institutions don’t operate on a regular lending market but on a so called “opportunity-

creation market” in which the biggest is the supply, the better. MFIs shouldn’t therefore look at

each other as competitors, but co-operate and exchange their experiences and discoveries in order to

34 From “Secrets”, leaflet for internal training of FM staff. 35 See FM “Annual Report 1999”. 36 See FM “Report on Activities as of 31st December 1998”. 37 Data from FM web-site.

71

improve the offer of the whole industry and generate a richness of options and different

methodologies to be exploited and improved by each organisation38.

Products and conditions. FM has always been alert in developing new, innovative products

in order to satisfy his clients’ need. But, before introducing these novelties, it’s better to review FM

general products and the conditions at which they are supplied. FM’s loans are granted in Polish

zlotys to micro-enterprises conducting different kinds of activities: borrowers use the amount either

for the purchasing of current assets, such as stocks, or for investment purposes, such as the buying

of machinery, equipment, premises. FM estimates that 31% of their granted loans are working-

capital loans, while the rest is used for longer-terms investments39. There are two normal types of

loans: the individual one and the solidarity-group one. Officially all loans are individual ones, but

within solidarity groups, members guarantee for each other and cannot obtain a further loan until

the whole group has fully repaid the previous loan-cycle. This second type is currently the most

common, because of advantages both on the borrowers’ and on FM’s side: for clients it is easier to

find co-signers who share their same situation, rather than asking for it to someone who doesn’t get

any return from the agreement, while for FM group-loans require less monitoring and permit to

collect instalments in just one visit with more probability of punctual repayment. At present the

two kinds of loans are offered at the same interest rate, but at first interests on group-loans were

artificially kept lower in order to stimulate their use. Interests on loans are fixed for the whole

period and are set to cover operating and risk costs and maintain the operational sustainability. The

average rate is about 22% on annual basis40, but it changes according to several factors such as the

particular product chosen, the length of the client’s relation with FM, past repayment records and a

qualitative evaluation conducted by loan-officers on the applicant’s motivation, entrepreneurial

skills, viability of business and cash flow management41. Loan-officers play a fundamental, delicate

and quite autonomous role in the final decision of conceding the loan to the potential borrower. It is

impossible to compare FM’s interests with banks’ ones (which are normally lower), because the

latter usually don’t grant such loans concerning risky micro-entrepreneurs. The size of loans ranges

from a minimum of PLN 5,000 (around US$ 1250) to a maximum of PLN 100,000 (ca. US$

25,000), but the first one cannot go beyond US$ 2,500.

38 From a personal interview with Witold Szwajkowski, Chair of FM’s Management Board and Agnieszka Czarnomska, Marketing and Public Relation Director, held in November 2002 in Warsaw. 39 Data from FM web-site. 40 From a personal interview with Witold Szwajkowski, Chair of FM’s Management Board and Agnieszka Czarnomska, Marketing and Public Relation Director, held in November 2002 in Warsaw. 41 See MicroBanking Bulletin, February 2000, p.34.

72

Three additional products are offered by FM: 1) “Micro Venture Capital” loans (MVC), 2)

“Honourable Guarantors” and 3) “Partnership Finance”. The first was introduced in January 2001

and tested on a group of clients who had been operating with FM for quite a long period and had

developed their business to a point were new investments became absolutely necessary. This form

of loan was meant to be an emulation of a capital investment of FM in the customer’s firm. Here is

how it works: FM proposes a loan to their clients, the interests of which are below the commercial

rate. During the repayment period the borrower has to pay only the monthly interest rate, while the

capital is given back in a lump sum at the end of the period. At this moment the borrower has to

take a decision: whether to repay the loan at the lower rate and close up the relationship with FM, or

to pay an additional sum that brings the interests paid so far, up to the commercial level and get the

chance to secure new loans in the future. The investor, FM, bears the risk of not recovering the

remaining interests, but, if the entrepreneurs extends his loan, the levelling of the rate represents the

equivalent of profit sharing with the investor. In case the customer decides not to pay a commercial

interest level, the “veto” put by FM on the granting of further loans is the equivalent of a

withdrawal from the investment – the sale of one’s own share with no further interest in the

customer’s firm42.

The use of a “Honourable Guarantor” doesn’t differ much from the use of any regular co-

signer. The only difference lies in the absence of a written, official declaration of the guarantor,

who needs only to present himself at FM outlet and confirm the commercial honesty of the

borrower and his own readiness to provide him with financial support in case of need43. This

particular kind of agreement is generally used when the sum requested by the borrower is too high

for finding an official co-signer. This mechanism implies a higher risk for FM, but concretely

there’s no much difference, because the legal report to a court is used only in extreme cases, while

the moral engagement of the guarantor keeps all the same a strong value44.

“Partnership Finance” is the latest development of FM’s research and the most original in

the Polish MF industry. It’s price is composed of two fees: the origination fee is equal to the loss of

money’s value during the time of the loan repayment and it’s deducted from the loan amount at the

moment of its disbursement (thus being non-refundable); the second charge is specified by the

borrower himself according to his profit expectations (confirmed also by the loan-officer) and it will

be paid in instalments at the time of the loan repayments. If, after paying back the credit, the

borrower declares that he has not obtained the prospective return (and the same is verified by the

42 see MFC Bulletin Spring 2001, p.10. 43 see FM Bulletin, January 2001. 44 From a personal interview with Witold Szwajkowski, Chair of FM’s Management Board and Agnieszka Czarnomska, Marketing and Public Relation Director, held in November 2002 in Warsaw.

73

loan-officer), this second charge will be refunded. As already mentioned, the aim of this offer is

sharing the risks between FM and its clients, but a deeper analysis of the internal mechanism of this

loan is required. Advantages for FM are consistent, though perhaps not immediately evident. The

requirement for the client to estimate his future profit, helps the officer to assess the client’s

intentions and to more deeply understand his way of thinking and taking his decisions and deepens

his analysis of the business project. Borrowers, on their side, are stimulated to supply correct

information and previsions about their benefits, because they know that offering a too small charge

to FM, they won’t get the loan amount they need. They have to face a sort of dilemma and will end

up offering a reasonable fee, usually a 5% higher than the normal one. Nonetheless they have got at

least three reasons for offering such a high charge: 1) they are given the only possibility to share

risks with someone (if their plan has got success they will have for sure money enough to repay the

charge); 2) they are offered a chance to develop a preferential relationship with FM, which will

estimate them as reliable and skilled entrepreneurs and will firstly turn to them in case of credit-

rationing; 3) paying their charge they will contribute to the process of creating opportunities for

other entrepreneurs, because the revenue of FM won’t be distributed among shareholders (as in

regular for-profit companies), but will be re-invested in FM’s funds.

Despite the various benefits, the majority of the clients shows a certain diffidence towards

this product, above all because they are asked to report their estimated future profit and to establish

by themselves the charge they are going to pay. During the first three months in which Partnership

Finance has been experimented in three branches, only a 10% of customers has chosen to adhere to

this new initiative, but FM Board hopes to reach percentages around 30% or even 50% of clients as

loan-officers become more and more familiar with the product and are able to promote it more

effectively45.

FM’s offer don’t confine itself to lending, but comprehend on-job consultation during the

drawing of the entrepreneurial project and during the entire repayment period, and training activities

through the arranging of informal workshops with experienced entrepreneurs who explain their case

and the way they have faced their business troubles. Mr. Szwajkowski underlined the need to

convey to FM’s customers a positive attitude towards entrepreneurship rather than business skills

and knowledge which can be easily bought on the market46. A strong educational concern is deeply

felt inside FM’s vision and is traceable in all its products and manifestation, entrepreneurship

becomes a value in itself to be taught and assimilated by customers.

45 From a personal interview with Witold Szwajkowski, Chair of FM’s Management Board and Agnieszka Czarnomska, Marketing and Public Relation Director, held in November 2002 in Warsaw. 46 Ibid.

74

Clients’ profile. In seven years of activity FM has been able to develop a formidable

network of outlets (30 up to this year) and loan-officers (around 70), reaching more than 27,000

clients and currently serving over 8,600 borrowers. Approximately 40% of them are women, while

the most recurrent business they run is trade (55%), followed by the providing of services (35%)47,

all of these businesses employ less than ten people. Most of them (78%) lives and operates in large

towns, while only a small 7% comes from rural areas48. According to Mr. Szwajkowski, FM’s

clients run very small business activities, but cannot be considered “poor” people. In his personal

opinion, Polish poor are not active and their passive attitude brings them to avoid any risk and

responsibility, while only expecting subsidies and support from the state. When approaching an

institution like FM, these people only ask for subsidised credit or grants and don’t feel like

committing to risk on their own. That’s why, reports FM Chair, FM target doesn’t focus specifically

on poor layers of population, who should be supported by state institutions, but rather on talented

micro-entrepreneurs willing to develop a business activity and maybe to employ just those poor

people who could reveal themselves excellent salaried employees49.

Institution’s performances. Coming to the common indicators for measuring MFIs

performances, all available data will confirm FM as the largest MFI operating in Poland and one of

those achieving the best results. As of November 2002, FM disbursed 52,900 micro-loans to a total

number of almost 27,500 clients, who were, at that date, more than 8,00050. The growth in the value

of loan portfolio outstanding has been impressing: if in 1996 this datum reached 1.6 million US$, it

more than doubled in the following year and reached 8.8 million US$ in 1998. The highest peak

was reached in 1999, with over 10 million US$, to fall during the following year and settling around

9.8 million in 200151.

During its seven years of activity (February 1995 – November 2001), FM has thus granted,

on the average, around 7570 loans per year, never employing more than 100 units (they were 88 in

1999) and managing about 150 clients per credit officer in the years from 1998 to 200152. On a total

lending capital equal to 20 million US$, FM distributed (as of November 2002) credit for a value of

99.7 million US$, almost 5 times the value of its original funds, obtaining more than 86 million

47 Data from “FM History and Results as of 1st November 2002” available on FM web-site. 48 Data from MFC questionnaire for the Regional Mapping Study. 49 Mr. Szwajkowski conception resembles the protestant one: everybody seems to have its role inside the society and only the acceptance of this role makes the good for the whole community. 50 Data from “FM: History and results as of 1st November 2002” available on FM web-site. 51 Data until 1999 are taken from the MBB, February 2000, p.33 while those for the year 2000 and 2001 are taken from the answers to the already mentioned MFC questionnaire. Some data taken from the two different sources seem but quite inconsistent with each other. For example: the MBB indicates a loan portfolio outstanding for the year 1999 reaching 10.1 million US$, while the same indicator in the questionnaire hardly reaches 8 million. 52 Data taken from the answers to the MFC questionnaire for the Regional Mapping Study.

75

US$ paid back with a delinquency rate after 180 days around 4.5%53. According to the data

supplied from FM for the MFC questionnaire, the value of write-offs during the year 2001

represented 3,42% of the average portfolio outstanding, while the same indicator for the previous

year was 1,96% and 1.78% in 1998, showing a negative trend of slowly growing unrecoverable

credits. Also the data about portfolio at risks after 30 days54 clearly point out the same negative

pattern, though the sources are often inconsistent with each other: if in 1996 this rate was almost

irrelevant (0.73%), it reached a considerable (although still low) 1.71% in 1999 and almost 3% as of

September 200155.

Indicators of efficiency are however highly satisfactory though slightly decreasing:

operating costs ratio56 for the year 2001 was of 15.2%, while one year before it was 1 percentage

point lower. Operational self-sufficiency57 has been fully reached and corresponded, as of

September 2001, to almost 108%; interests and fee income from loans amounted to 2.84 million

US$ , while total operating expenses were slightly more than 2.64 million58. FM is thus completely

able to cover all its operational expenses thanks to the revenues from the granted loans and to get

further profit too which is reinvested to continuously improve its performances.

Current problems and future prospects. According to the answers given to the MFC

questionnaire on the occasion of the drawing of the Regional Mapping Study by the MFC Research

Department, FM identified as most pressing constraints in fulfilling the institutional mission: 1st) a

lack in institutional capacity; 2nd) a lack of client demand or eligible borrowers and 3rd) a lack of an

appropriate legal and regulatory environment.

Asked for the meaning of the term “institutional capacity”, Mr Szwajkowski indicated the

necessity for FM staff to more correctly understand the company’s vision and put it into practice,

being able to offer the product which most suits the customer’s need and to build a personal

relationship based on mutual trust with the borrower. There is a need for people who could better

motivate loan-officers in their non-conventional approach with clients. Concerning the second

problem, it’s worth noticing that FM is the only Polish MFI expressing this sort of constraint to its

activity (lack of eligible borrowers); most of other institutions indicates the opposite, that is a lack

53 Data from “FM: History and results as of 1st November 2002” available on FM web-site. 54 Obtained dividing the unpaid balance of loans with a payment more than 30 days late by the year-end portfolio outstanding. 55 Data for 1996 and 1999 are taken from MBB, February 2000, p.35. Data for 1998 and 1999 slightly differ between the MBB and the answers given to the MFC questionnaire, especially for 1999, MBB reports a portfolio at risk after 30 days equal to 1.71%, while in the questionnaire the same indicator is 1.21%. 56 Obtained dividing total operating expenses less loan loss provisions by the average total assets. 57 Obtained dividing operating income by total operating expenses (including administrative expenses, interests expenses and loan loss provision). 58 Data taken from the answers to the MFC questionnaire for the Regional Mapping Study.

76

of capital to fully provide loans to their demand. On the one side, FM has been lucky in receiving

such a huge amount of loan-capital (US$ 20 million) since its beginning, which has been for sure

efficiently used and preserved, but on the other, the hard selection of its potential borrowers let a

big amount of this capital out of use, just lying in FM fund (on a total amount of US$ 20 million,

from September 2000 till the same month of the following year only a volume of US$ 9.8 had been

granted as outstanding loans59).

On the contrary, the adverse legal and regulatory environment is a problem felt by most of

MFIs in Poland (except for Credit Unions, which enjoy a special regime). Being registered as a

Limited Liability Company (no other more suitable legal forms being available, except for that of

“Foundation”, which implies other problems), FM officially turns out to be a commercial

organisation and is subject to the same tax-regime as for-profit companies, though not paying any

dividend to its owners. This fact has two important consequences on FM’s activity: on the one

hand, it raises the operational costs and imposes to the company to set higher interest rates on loans,

while on the other, being recognised as a commercial organisation from the State itself, has a

relevant impact on FM image and renders more difficult and time-consuming creating a right

awareness in the clients of FM’s supportive and not-for-profit mission.

So far as the future prospective of FM is concerned, according to its Chair Board, much will

depend not only from the course of Polish economy, but mostly from the development of FM target:

if the group of talented entrepreneurs is going to enlarge, FM will expand its services even more,

offering new products and a better arranged activity of “attitude-training”, otherwise there will be

no need to further continue the activity60.

5.2.2. “Inicjatywa Mikro”.

Origins and development. Inicjatywa Mikro (IM) started operating as a pilot project of

Fundusz Mikro with a fund of US$ 1 million conceded by the Polish American Enterprise Fund. Its

mission, since its beginning, has been the supporting of local micro-enterprise development in the

Southern part of the country. It transformed into an independent MFI, registered as a Limited

Liability Company, in February 1996, when its main donor supporter became Opportunity

International, which had been invited to Poland to provide technical assistance and to develop

adequate standards for the MF industry in the region. Currently IM has three outlets in the regions

of Maloposka and Slaski, located in the towns of Krakòw, Katowice and Bielsko-Biala, with two

loan officers for each branch. This Southern area, inhabited by approximately 6 million people,

59 Ibid. 60 From a personal interview with Witold Szwajkowski, Chair of FM’s Management Board and Agnieszka Czarnomska, Marketing and Public Relation Director, held in November 2002 in Warsaw.

77

which amounts to 17% of the entire population of the country61, has been chosen for its particularly

disadvantaged situation in the transition process: under the communist regime great state-owned

factories were situated near Krakòw, these are now undergoing a heavy restructuring process and

are generating huge unemployed masses. Furthermore, outside these industrial areas, agriculture is

predominant, but backward and soon after the fall of the planned system couldn’t keep up with the

competition generated by a new, open market-economy. The two other towns where the remaining

branches are located were characterised by the presence of mines and a well developed

metallurgical and chemical industry, which is now heavily reducing its activity and producing high

unemployment rates among former miners and manual workers62. The attention of IM is therefore

deeply focused on supporting the financing of start-up micro-businesses, important for the re-birth

of a sound economy in the area, generating new incomes and employment and serving as examples

of private successful initiative to the discouraged population of the two regions. IM’s target

includes therefore start-ups and already set-up registered activities, employing less than 10 people,

that could not qualify for a regular bank loan63 because of lack of adequate collateral, a relative

short period of operation or the use of a simplified bookkeeping system64.

Since December 2002, IM is co-operating with the MFC Research Department for the

development of a simple monitoring- and impact-assessment tool, which could be used on an on-

going base, but being at the same time, inexpensive and little time-consuming. Concerning impact-

studies, a series of interviews had been made in the past on drop-out clients to better understand the

reasons for their withdrawal from IM’s program. It turned out that drop-outs didn’t need to be

considered as a failure on IM’s side, but, on the contrary, as a success, since most of the clients

leaving IM had graduated to the banking level, while others had made enough investments and

generated enough revenues to cover their financial needs.

Products and conditions. IM’s offer is much more simplified than FM’s, it consists of loans

ranging from PLN 1,000 to PLN 30,000 with the maximum term of 24 months65. They are issued to

individual entrepreneurs or to solidarity groups consisting of 4-5 people. The average loan size, as

of January 2002, was around PLN 9,600 (ca. Euro 2,360) and the average term 13.5 months. IM’s 61 Data from MFC “Report: AIMS and MFC Impact Assessment Project”, Warsaw, 2000, available on MFC web-site. 62 See DOLEGOWSKI T., MIELUS P. and SPYCHALSKI M. “Finanza per lo sviluppo: il caso Polonia” in “Finanza, imprese e sviluppo locale: casi di paesi europei in transizione.” by VISCONTI M and GRBAC D., edited by Giuffrè, Milan, 2001, p.99. 63 “Almost a half of IM’s clients applied for commercial bank loans, and the majority of them were not granted such a loan. Among those who did receive a bank loan, the majority was granted a regular consumer loan rather than a loan for commercial activities” in “IM Individual Report” in MFC Report: “AIMS and MFC Impact Assessment Project”, Warsaw, 2000, p.95. 64 From a personal interview with Izabela Norek, Chair of IM’s Management Board, held in November 2002 in Warsaw. 65 See MFC Bulletin, Spring 2001.

78

nominal annual interests range from 15-16% for individual loans and 14-15% for solidarity groups

to a maximum of 29%, but the rate for the first loan is usually not inferior to 25%66. The setting of

the rates depends on different factors: on the loan-officer’s risk assessment process, on the

customer’s loan-history, on the number and reliability of the guarantors provided and on the

specific kind of project the client falls within. As a matter of fact, one of IM’s recent project is to

offer loans at a lower interest rate (around 19%) for women starting their own business. This

novelty is supported from the Levi Strauss Foundation and is revealing a very positive reception, as

unemployment among women is growing more and more acute67.

Loans are issued (usually within one week from the signing of the contract) for two main

purposes: as working-capital (52%) or for longer-term investments68. For every type of loan granted

by IM no formal collateral is required: two or three co-signers and the consent of the borrower’s

wife or husband are enough to constitute an acceptable guarantee. It is not necessary to present a

detailed business-plan, but the eligibility of the potential client is assessed through his own

declaration about his financial situation and properties owned, through the consideration of the

volume of his current or estimated orders and of his simplified cash-flow. The applying client must

demonstrate to have a clear and viable business plan in his mind, while the officer can, if needed,

decide to go and personally visit the business activity before approving the loan. The final decision

is taken by a special central committee, to which the loan-officer must deliver a detailed case-

analysis and recommendation. The opinion expressed by the officer is highly considered in the case

66 Data from Inicjatywa Mikro web-site (Polish version): www.inicjatywamikro.pl. 67 see MFC Bulletin, Spring 2001.

68 Ibid.

79

evaluation; loan-officers have the autonomous power to directly reject potential clients not ensuring

the minimal requirements. The activity of repayments’ monitoring is conducted through a special

software and through irregular visits of the officers, in order to personally verify the ongoing

situation of the business. Each officer has to take care of about 100-120 customers.

Clients’ profile. IM’s typical borrower is an owner of a local store, a kiosk in an open-air

market, a small restaurant, or a construction company. He or she may be, for example, a hairdresser,

a beautician or a carpenter. From IM’s statistics it results that most of them are men (59%), running

a trade activity (48% of the total), while 37% work in the providing of services, a 8% in production

and the remaining present a mixed profile. Some of them started as self-employed and now provide

jobs to a few other people, offering a wide range of products or services. Chart 5.4. IM: total number of loans granted (blue) and total number of active loans (yellow). 12/1996 - 2001.

Source: IM web-site (Polish version) www.inicjatywamikro.pl.

Chart 5.5. Value of loans disbursed (blue) and of active loans (yellow). 12/1996 – 12/2001.

Source: IM web-site (Polish version): www.inicjatywamikro.pl.

Institution’s performances. Coming to analyse IM institutional performances, by December

31, 2002, Inicjatywa Mikro disbursed 3,058 loans for a total amount of over 30.6 million Polish

80

Zloty (around 7.6 million US$) to 693 clients69. As can be clearly seen from the charts, IM’s growth

has been steady, but growth rates tend to decrease with time and according to the increasing number

of loans disbursed and their total value. Between the first and the second year of activity (1996-97)

the growth rate of the number of loans disbursed was impressing: 237%. This datum turned into

105% between 1997-98, to reduce to 52% the following year and reach more sustainable rates in the

years 1999-00 (35%) and in the last available period 2000-01 (22%). Such decreasing growth rates

are not alarming: on the one side, the institution has only recently reached its maturity with its seven

years of experience and on the other, it keeps on improving its performances despite the

deteriorating macroeconomic situation in the country. At this point another consideration is worth

doing: if we take into account the growth rates for the value of loan disbursed, it comes out that,

starting from the second year of operations, they are always higher than the growth rates for the

number of loans. For example, if between the years 2000 – 2001, the growth percentage for the

number of loans granted was 22%, the same indicator for the value of these credits was 30%. This

means that the loans delivered are becoming larger and larger year after year. This can be

considered a positive result, showing that the projects of entrepreneurs applying for a loan to IM are

becoming more and more demanding and maybe able to give a more incisive contribution to job-

creation and to the general economic and social development of the communities where the

investments are realised.

Current problems and future prospects70. According to Mrs. Norek, Chair of IM’s

Management Board, four are the main current problems IM has to face: 1) a recessive economic

environment 2) lack of funds; 3) an unfavourable legal environment and 4) competition from other

MFIs like Fundusz Mikro and The Polish Rural Foundation, operating in the same areas.

Regarding the first mentioned difficulty, IM and its potential customers strongly feel the

effects of the negative economic situation generated in the country after the Russian crisis of 1998.

Two are the most remarkable and still influencing consequences: the first is the spread distrust and

fear to set up business activities among people, because of the uncertainty and changeability of the

economic cycle which characterises an open market-economy. As a matter of fact, in the immediate

years after the fall of communism, market-economy was thought to be a lasting solution to the

many faults of the planned system, which would bring an indefinite wellness to the population. The

appearance of crisis and recession dissolved hopes and spread a sense of dismay, which still

nowadays restrains the taking of private initiative. The second consequence is more practical, but 69 Data directly received from IM’s Central Office, on the author’s request. 70 From a personal interview with Mrs. Izabela Norek, Chair of IM’s Management Board, held in November 2002 in Warsaw.

81

very important while running a business activity: since the beginning of economic recession, pay

terms have become longer and longer and especially small firms (like the very common

construction companies) suffer from strong cash-flow problems which prevent them from

purchasing stocks and plan new investments.

The second constraint (lack of funds) is very common among small and medium-sized

Polish MFIs and deeply affect their chance of growth. This factor is profoundly tied to the third

obstacle identified (that is the unfavourable legal environment): in order to be allowed by the law to

collect savings from the public that could support the gathering of a larger capital for loans, MFIs

have to meet onerous starting capital requirements (around US$ 20 million), which are almost

impossible to satisfy. On the other side, borrowing on a commercial base is too expensive for such

institutions. The setting up of an integrated information system about clients could turn out a useful

instrument both for banks and for MFIs too. Still concerning the legal environment, Mr. Norek

identified two problems in common with Fundusz Mikro: the lack of a specific and satisfying

regulation and the consequent necessity to register as Limited Liability Company, with all the

implied costs.

Looking at the future, IM plans to serve more start-ups, to raise more capital (counting on

eventual funds from the European Union) in order to expand its activities and to offer a more

structured service on the advisory side.

5.2.3. Fundacja Wspomagania Wsi (Rural Development Foundation).

Origins and development. The Rural Development Foundation is a private, non-

governmental, not-for-profit organisation established in 1999. Its mission is “to support economic,

social, cultural, educational and pro-environmental initiatives of rural and small-towns inhabitants,

thus contributing to all-sided, sustainable development of rural Poland”71. The origins of the current

institution date back to the early ’80 of the last century: the U.S.A. government wanted to support

Polish rural areas, but didn’t trust the communist regime and didn’t want to entrust its funds to the

state. It was therefore decided to convey the funds to the Polish Catholic Church, deeply rooted in

the countryside and reaching even the smallest villages. Church hierarchy expressed a favourable

opinion on the initiative, but didn’t want to directly manage the funds and tried to set up and

independent foundation. After 5 years of troubles, the “Water Supply Foundation” was established

in 1987 (it turned out to be the first foundation established in this part of Europe after World War

II). The regime usually didn’t allow the creation of autonomous organisations let alone

confessional one, but the setting up of a foundation for the development of the Polish water supply

71 From the promotional leaflet: “FWW: our programs in 2002”.

82

system didn’t seem to constitute a threat to the communist ideology and was therefore allowed in

the end. The activity of the foundation consisted of promoting and financially supporting projects

regarding the entire water supply system and purification plans and the improvement of agriculture

techniques, through the implementation of modern sewage systems, though the support to rural

farmers went often beyond the official mission.

After the changing in the political regime, a new foundation was registered: the

“Agricultural Foundation”, established in 1991. Its mission was similar to the one carried out by the

Water Supply Foundation (that is the development of private initiative and entrepreneurial activities

in rural, depressed areas), but it was accomplished through the disbursement of micro-loans to

active rural entrepreneurs; the scale of operation was but more little than the current one and loans

were of very small entity72. It was only in 1999 that the two, almost twin-institutions merged in the

“Rural Development Foundation”, which “has been continuing the work of its predecessors,

addressing the concerns of rural population and directing its resources to social and economic

goals”73. The micro-loan program was set up right from the beginning of the operations of the new

institution, that is in early 1999. Main goal of the project is the reduction of unemployment and the

fostering of private initiative deriving from low-income individuals and groups living in rural areas

and small towns74.

Financial funds for covering the program come from three main sources: 1) the foundation’s

own capital; 2) the governmental “Rural Agency”; 3) a special loan granted by the World Bank to

the Polish government. The agreement between the Rural Agency and the Foundation was signed at

the end of 1999 and provided for a joined investment: both the Agency and FWW had to deposit in

the loan fund PLN 1 million and the latter had to undergo to some special conditions in the use of

funds. Two of them were i.e.1) that at least 51% of the loan-capital had to be distributed, in form of

loans, to former state-farms’ workers currently unemployed and 2) that operational costs couldn’t

go beyond the quote of 35% of the value of loans disbursed (this second condition remained unmet

for a long period).

Nowadays the program reaches the population of 27 “poviats” (the second smallest

administrative unit, a sort of province) and of their neighbourhoods through a network of 30 trained

and competent loan-advisors and a total staff of 38 people. Poviats where FWW operate are mainly

concentrated in the Northern part of the country and in the Southern East one. Here are located the

72 Details on the origins and development of FWW are taken from a personal interview with Mr. Kopanski, FWW’s Inspector, held in Warsaw in December 2002. 73 From FWW web-site: www.fww.org.pl. 74 It must be borne in mind that 42.7% of the total number of unemployed people, as of 31st December 2001, belonged to rural areas. Data taken from FDPA: Rural Development Report: “Rural Poland 2002.”,Warsaw, 2002, table A13.

83

regions which most strongly feel the effects of the closure or restructuring of state-owned industrial

complexes and farms and where unemployment and social marginalization reach their peak.

Products and conditions. As all the “classical” MFIs operating in Poland, also FWW offers

two main kinds of loans: the individual- and the group-loan, with the latter supported by the

favourable offer of interest rates usually 2 or 3 percentage-points lower than the individual one.

Four are the categories of available sizes offered: “type A” starting from whatever sum up to PLN

3,000; “type B” up to PLN 5,000; “type C” with a maximum of PLN 10,000; “type D”, the highest

of all, reaching PLN 15,000. Interests range from 11% to 17% for individual loans and from 9% to

14% for solidarity groups and the maximum repayment period is of 18 months for type A and 24

months for the other types75. The average loan ranges from PLN 5,000 to PLN 6,00076, a much

lower sum than other institutions such as Fundusz Mikro. Conditions of FWW’s loan-offer in terms

of interests and repayment time seem to be more favourable than other MFIs’ products and

particularly tailored for the lower-income population typical of rural, often remote areas and small

towns. A problem arises when a customer, though endowed with entrepreneurial skills and willing

to develop a brilliant and viable idea, asks for a too high sum of money. In this case, FWW’s

advisors offer the highest possible sum according to the clients conditions, but cannot go further

than the maximum amount of PLN 15,000.

Once again loan-advisors play an important role in the decision of granting the loan to the

potential clients, but FWW’s structure is quite articulated. First of all, loan-officers are not directly

employed by the foundation, but are professionals who set up their own office in the poviat and co-

work with FWW running the micro-loan program for the institution in one or two provinces. They

must live in the area in which they operate, in order to better understand possibilities and constraint

offered by the local market and deeply analyse the position of their clients’ competitors. A group of

5-6 loan-advisors operating in adjoining regions are monitored by an inspector, who is responsible

for their activity and results, who co-operates with them and the clients and keeps regular contacts

with local authorities. Above the level of the inspector there is the Board, who independently takes

the last decision on the concession of loans, evaluating the application-forms and the basic

business-plans presented by the loan-advisor and eventually by the inspector, on behalf of his

customer. FWW’s application form, simple and customer-friendly, is sometimes the tool through

which clients, for the first time, self-assess their business-idea and have to face a serious evaluation

of their intention. Information asked in the application-form refer to the product they intend to offer,

75 From the promotional leaflet: “FWW: Program Mikropoziczek” (Polish language), March 2001. 76 From a personal interview with Mr. Sebastian Kopanski, FWW Inspector for Zachodnio-Pomorskie, Pomorskie, Kujawsko-Pomorskie and Warminsko-Mazurskie, held in Warsaw, in December 2002.

84

the goal they want to reach through setting up their own business, their expected competitors and

the advantages they may offer to their clients, their expected monthly expenses, revenues and

profits, a simplified model of cash-flow and the financial sources thanks to which they plan to settle

their activity. This process of decision-making, though longer and involving many people, is

positively judged by Mr. Kopanski, FWW’s inspector, because an external committee considering a

client’s case is less emotionally involved and often raise unexpected questions and matters,

previously not considered by the loan-advisor. From the official signing of the agreement, loans are

effectively delivered within two-three weeks.

FWW, besides granting micro-loans, provides technical assistance and ono-to-one counsel

held by loan-officers themselves. Furthermore, thanks to a special additional program, FWW can

cover the costs of social insurance fees of the self-employed former state-workers up to 12

months77. This latest service is highly appreciated by the customers, since the payment of ZUS

(social insurance fee) represents a heavy burden on the balance of every registered business.

Clients’ profile. FWW’s target is partially different from other MFIs and varies depending

on the area in which clients live. The original effort of FWW was led to obtain the deepest possible

outreach. This goal couldn’t be reached for two main reasons. First, the money they received from

the Rural Agency was conditioned to special requirements concerning the beneficiaries of loans

(51% of loan capital should be delivered to former state-farm workers) and expenses, which

couldn’t overcome the 35% of the value of the capital disbursed in the form of micro-loans. This

quota was too low to allow FWW to go deeper in its clients’ outreach, because reaching poorer

clients is also much more expensive. The second problem concerns poor people themselves, who

often lack the indispensable knowledge and skill to set up and run a business in an open, market-

economy. Giving them a loan would probably mean starting an activity bound to fail, with the

twofold consequence of a difficult re-collection of the sum on the foundation’s side and the

generation of a hard debt on the poor customer’s shoulders. Besides, the Rural Agency, providing

public funds, requires them to be used in the most efficient way.

FWW’s current target is therefore mainly composed of former state-farms and factories’

employees78, rural youth, farmers not able to support themselves from agriculture and entrepreneurs

who are not collateral-eligible for regular banks. Most of them, differently from FM’s and IM’s

clients, live in the countryside or in small towns; only 38% of them are women and their average

age is around 38 years, while only few are younger. The majority of them (46%) provides services

(like hairdresser’s, beautician’s, agritourism and so on) often in small individual companies, while

77 See promotional leaflet: “FWW: our programs in 2002” 78 more about ex state-workers conditions and their attitude towards entrepreneurship especially in the area of North-west Poland in paragraph 5.4.

85

27% works in trade, often owning retailer’s stores or “mobile” stores, that is to say trucks which

visit villages in rural areas once or twice a week and sell their goods in the open-air or deliver them

directly at the client’s home. This kind of activity is by far more efficient and less expensive than

owning a shop in a village, because it permits to save on the store’s rent, to reach more clients and

not to be stuck in one place. Only 10% of FWW’s borrowers set up a firm in the field of production,

especially of furniture and dried-flowers compositions79. According to Mr. Kopanski, the best

performing ones are those producing tools to be exported in the near Germany at low prices, while,

more in general, there’s not much market-space for those activities trying to make money on the

neighbouring population, except for bars and food-stores80.

Institutional performances. Up to now FWW has granted almost 2,600 micro-loans for a total

amount of over 3.6 million US$, offering their micro-loans to nearly 1900 customers. Performances

of FWW are extending, especially in the last year 2002. As a matter of fact, only about 200 loans

were conceded in 1999, they became 800 the following year, to temporary fall to 600 in 2001 and

grow up to 1000 in 2002. On the contrary, the size of loans disbursed is tendentially decreasing: if

in 2000 the average loan was around 7,400 PLN, two years later it didn’t even reach 5,300 PLN.

This trend is likely to indicate a deepening outreach for the institution, which is more and more

committed to reach a lower-income population and to operate in more remote and disadvantaged

areas.81

199 203

803 710587

469

987

508

0

200

400

600

800

1000

1999 2000 2001 2002

Chart 5.6. Number of loans disbursed and clients reached by FWW

number of loans disbursed number of clients

Source: author’s elaboration based on data directly received from FWW’s Central Office.

79 From a personal interview with Mr. Sebastian Kopanski, FWW’s Inspector, held in Warsaw, in December 2002. 80 Ibid. 81 Data collected during a personal interview with Mr. Kopanski, FWW’s Inspector, held in Warsaw in December 2002 and received by e-mail at the author’s request by FWW Central Office.

86

5.2.4. Foundation for the Development of Polish Agriculture (FDPA).

Origins and development. FDPA is a private, not-for-profit institution established in 1988

with the main goal of sustaining the transition to an open market-economy of the Polish food and

agriculture sector and promoting the development of civil society in rural areas, where currently

38% of the Polish population live82. Today the foundation is managed by Monika Szymanska.

FDPA runs two main programs: the “European Integration Program” (EIP) and the “Rural

Entrepreneurship Promotion Program” (REP). The first project is aimed at supporting the

integration process of Polish rural areas into the European Union framework, empowering rural

people with the instruments needed to diversify economic activities, modernise agriculture

techniques, and building a stronger civil society. The REP program is a microcredit initiative started

in 1993, whose main goal is to sustain and to promote local development in rural areas, inspiring

entrepreneurship and fostering the setting up of micro- and small business activities which “are the

backbone of strong communities, since they provide jobs, develop infrastructures and stimulate

economic growth”83. REP was the first established micro-lending program in Poland and it is still

nowadays the only one operating exclusively in rural areas, through its four field offices located in

the poviats of Zachodnio-Pomorskie (Polczyn Zdroju), Mazowieckie (Siedlce and Plock) and

Malopolska (Nowy Sacz). Field offices reached the number of six in past years, but two of them

had to be closed (the first in 2000 and the second two years after) because of budget constraints and

in order to put aside some funds to start a new program in partnership with the World Bank. Funds

to finance FDPA’ s support programs derive from international donors such as the Caritasverband

Deutschland, the Polish-American Enterprise Fund, the Levi Strauss Corporation and the British

Know-How Fund84.

Originally the program was exclusively targeted on women, who mostly suffered from the

dramatic situation of diffuse unemployment especially in rural areas85, but, as time passed, the

particular social structure of Polish family, where the man is still the major leader of family’s

business affairs, turned out to be too a strong obstacle to the pursuing of such a goal. Businesses,

though entirely run by a woman, were often officially registered under her husband’s name and his

consent was therefore necessary to sign the loan agreement with FDPA86. The only prerequisite to

82It’s furthermore worth noticing that the EU average of population living in rural areas is of 20,7%, almost the half. Data taken from FDPA: Rural Development Report: “Rural Poland 2002.”, Warsaw, 2002, table A2. 83 From the FDPA web-site: www.fdpa.org.pl. 84 Information sent by e-mail, at the author’s request, by Mrs. Sabaranska, FDPA Field Office Co-ordinator. 85 Women’s rural unemployment is almost 3% higher than men’s one (respectively 18.2% and 15.5%), but if we consider only the “non-farming” unemployment in rural areas the difference is of almost 6 percentage points (women’s rate: 30.2%; men’s rate: 24.4%). Source: FDPA: Rural Development Report: “Rural Poland 2002.”, Warsaw, 2002, table A17. 86 From a personal interview with Mrs. Katarzyna Sabaranska, FDPA Field Office Co-ordinator, held in Warsaw in November 2002.

87

access the funds of FDPA became therefore living in a rural area, though the Levi Strauss

Foundation has recently established a particular fund for unemployed people also living in urban

environments. The latest arranged project is nowadays under implementation and will be carried out

in partnership with the World Bank. It will be based in two regions: Malopolska, in the South of the

country and Zachodnio-Pomorskie, in the North-west. It will consist of preferential loans plus a

small grant conceded to micro-entrepreneurs living in rural areas, whose activity has less than one

year’s life and in need for capital to improve it. The maximum amount will be of PLN 5,000 for 3

years. 25% of the sum granted will be offered by FDPA, while the rest will come from the World

Bank’s funds.

Products and conditions. Loans granted by FDPA cannot go beyond the amount of PLN

20,000 (around Euro 5,000), while the maximum sum conceded on the first loan reaches PLN

15,000, and are assigned to people willing to start their own entrepreneurial activity outside

agriculture. This is the real, concrete condition set by the program: the aim is in fact to develop new

economic activities in rural areas, where agriculture is usually over-extended and characterised by

low productivity and revenues87. Two are the usual types of loans: the individual- and the solidarity-

loans with groups of about 5 people, which is applied for only by a minority of around 10% of the

beneficiaries88, perhaps because of the distance among borrowers in rural, remote areas. Loans are

concretely used for purchasing machinery, computers, cars, stocks or whatever small investment is

needed for developing the business, but are not consumer-loans. Interests are not subsided, but are

set at the annual competitive rates from 14% to 16%, plus a commission of 3%89. Clients are able to

repay such charges and willing to do it because they realise FDPA’ s funds are their only chance for

financing their activity, since most of them have no access to bank credit offer. Besides, FDPA’ s

procedures are extremely simple and quick: once the potential borrower gathers the few documents

required and finds the two co-signer who guarantee for him or puts up a solidarity group, only 3-5

days are required to materially receive the money. Furthermore, customers know that they can

always count on FDPA’ s local officers, always providing a friendly, supportive loan service, if they

need to receive advice in the areas of business-planning, forecasting or financial management of

their firms, but also a concrete help in the registration of their business. 87 Just to get an idea: Poland’s land productivity (gross value added per 1 ha UAA) is slightly more than a half of the EU average level with a value of € 588 (while the European one is of € 1107), while yield on cereals is less than a half of the European one: 25.3 deca tonnes / ha for Poland and 57.0% for EU countries. Source: FDPA: Rural Development Report: “Rural Poland 2002.”, Warsaw, 2002, table A33. More about the shortcomings of Polish agriculture also in DOLEGOWSKI T., MIELUS P. and SPYCHALSKI M. “Finanza per lo sviluppo: il caso Polonia” in “Finanza, imprese e sviluppo locale: casi di paesi europei in transizione.” by VISCONTI M and GRBAC D., edited by Giuffrè, Milan, 2001, p.100. 88 Information sent by e-mail, at the author’s request, by Mrs. Sabaranska, FDPA Field Office Co-ordinator. 89 Ibid.

88

Loans must be repaid within a flexible period ranging from three months to two years,

depending on the amount and usage of it. Clients themselves asked for an extension in the loan

repayment period, which originally was much shorter, because, especially for start-ups, the first net

revenues were generated a long time after the investment, usually after more than one year.

Repeated loans are very common, even among clients who have already reached a bankable level,

but who are accustomed with the foundation’s simple procedures and don’t want to pass to the

bureaucratic banking system. FDPA is willing to accept this potentially “graduated” clients, because

they allow the foundation to get higher profits running lower risks and sustaining lower costs and,

as a consequence, to be ready to run a higher risks with poorer borrowers more in need for

financing.

FDPA’ s internal structure and decision-making procedure are very simple and implying a

restricted staff: two co-ordinators in the head-office located in Warsaw, one of whom is also the

general director of the whole program, plus 5 loan-officers are distributed among the four field-

offices. The final decision is taken by a central committee which meets once or twice a week, and to

which all the documentation regarding the applicants is addressed. Once the loan is assigned, loan-

officers’ main task consists of regularly monitoring their clients’ activities through personal visits

and phone calls to remind the repayment terms when they get nearer. This constant monitoring

helps establishing a more personal relationship based on trust and familiarity and to keep low

delinquency rates.

The foundation, besides financial services, provides also extensive training courses for

potential entrepreneurs lacking knowledge about financial systems, planning and business

management, with a focus on the development of agritourism activities. Courses are free of charge

and are financed thanks to private donations from various donors who approve the FDPA’ s training

project. To date, training initiatives have been attended by more than 4,000 potential entrepreneurs

and are highly appreciated because they convey concrete competencies and allow owners to run

their activities in a more rational and precise way, having a longer-term approach in their business-

planning. Sometimes entrepreneurs themselves are not even aware of their own ignorance in basic

management’s matters, because they think their experience in the manual activity they carry out is

enough for running their company, but they don’t realise that the lack of i.e. accountancy or

marketing skills can make the difference between a successful initiative and a failure90.

Clients’ profile. Given up the original only-women target, FDPA turned to all potential

entrepreneurs living in rural areas. Attention has been focused since the beginning on these kind of 90 From a personal interview with Mrs. Katarzyna Sabaranska, FDPA Field Office Co-ordinator, held in Warsaw in November 2002.

89

areas because, according to Mrs. Sabaranska91, they have been neglected for many years, while they

actually are the areas where unemployment reaches the highest peaks. Polish agriculture in fact,

though very extended, is very little remunerative for farmers, who often need a second economic

activity to make both ends meet. But in order to set up an alternative source of income they need

institutions that finance their starting-up. Particularly in need for financial support are three

categories of people: unemployed (often former state-farm workers), youths and women; all of them

often lacking a reliable credit-history and pledgeable collateral to access the banking system. Young

people are especially difficult to be reached by a lending program, because they often lack any

work-experience and any business management skill92. Potential customers get to know about the

foundation and its services mainly through interviews to officers and active clients published in

local gazettes, through free literature and business networks, but positive experiences of satisfied

clients spread in the villages through the typical passing the word of small communities.

Furthermore, loan-officers are very present in local social life of the villages where they operate and

don’t waste any chance to promote FDPA’ s activity.

0

500

1000

1500

2000

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Chart 5.7. Number of loans disbursed each year and cumulated by FDPA. (1993-2002)

loans disbursed each year total loans disbursed

Source: author’s elaboration based on data directly supplied by FDPA Central Office on the author’s request.

Institutional performances. As of December 2002, FDPA, during the ten years of activity of

its REP micro-loan programme, disbursed over 1,680 loans for a total amount reaching 17.6 million

PLN (around 4.4 million US$). It’s not an impressing datum, if compared to other MFIs operating

in Poland, but it must be borne in mind that the micro-lending programme represents just one part

91 Ibid. 92 In 2001 in rural areas 33% of unemployed people had less than 24 years old, while 61.3% was under 34 years. Source: FDPA: Rural Development Report: “Rural Poland 2002.”, Warsaw, 2002, table A15.

90

of the more structured activity of the foundation. Besides, a meagre loan capital of 3.5 million PLN

(neither reaching 1 million US$ and exactly amounting to 875,000 US$) cannot but be insufficient

to deliver the number of loans required by the considerable demand.

Looking at the charts, it’s self-evident that the number of loans disbursed every year is not

increasing but, on the contrary, strongly decreasing since the year 1999. There is no univocal

explanation, but various factors are implied. The decrease in the period 1998-99 can be attributed to

the deep Russian crisis burst out in 1998, which fully showed its effects in Poland only with the

following year on. Besides, in 2000 and 2002, two of FDPA’s branches had to be closed because of

the lack of lending capital to supply them. At present delinquency rates are satisfactory, being

around 10% after 30 days and 1.5% after 180 days. It’s likely that, thanks to the expected World

Bank’s funds, FDPA activity is going to further develop in the future.

Current problems and future prospects. According to Mrs. Sabaranska93, the biggest

obstacle on the way of the REP project’s growth is constituted by the lack of an adequate lending-

capital: while the present loan-capital reaches PLN 3.5 million, the ideal one would be of PLN 8

million94. This shortage prevents the foundation not only from delivering loans to all potential

eligible borrowers, but, as a consequence, also from collecting from them a sufficient amount of

revenues to cover at least the operational costs of the program and reaching a desirable operational

sustainability. To achieve this goal with the given capital, interests should be raised at the double of

their current level, which is inconceivable because it would further discourage the already reluctant

entrepreneurs pushing them to the “Regional Financing Institutions” or to money-lenders and would

generate adverse-selection problems. FDPA’ s funds, as already mentioned, come from

international donors: some of them, like those from USAID, are strictly conceded to cover

operational expenses, but are not sufficient, as well as the others dedicated to loans though

proceeding from seven different donor institutions. The foundation has applied to the state for

additional funds for many years, in particular to the Polish Agency for Enterprise Development

(PARP), responsible for the implementation of a network of small local funds granting micro-loans,

but has always received a negative answer because of a formal problem: FDPA’ s statute doesn’t

explicitly specify that the foundation purpose consists of supporting the development of

entrepreneurial activities through microfinance programs, though this is exactly what FDPA has

been carrying on since 1993.

93 This sub-paragraph reports Mrs. Sabaranska opinion, expressed during a personal interview held in Warsaw in November 2002. 94 Information sent by e-mail, at the author’s request, by Mrs. Sabaranska, FDPA Field Office Co-ordinator.

91

Another problem FDPA’ s officers have to face could be represented by the competition

from the “Regional Financing Institutions” (Loan Funds) and money-lenders active on the same

areas, but, after a deeper analysis, they turn out to be no real competitors, because they operate

under different conditions. The access to the loans of the first supposed competitors, the Regional

Financing Institutions, is not so easy as with FDPA and requires the accomplishment of different

tasks after the loan is granted, like employing at least one more person and paying the relative social

insurance for a certain period of time. The great advantage of this source of financing is that

interests on the loan issued are practically absent, but this doesn’t compensate the difficulty of

meeting the above mentioned requirements. On the other side, money-lenders, organised as

informal or legally registered institutions, offer credit almost on the spot, but require

disproportionate interests on loans (even more than 50% rates) and use unconventional, sometimes

inhuman methods to force repayments. That’s why they are considered a last source of financing in

case of extreme emergence. In this sense, they are not proper competitors for FDPA, because they

respond to a different need, often not even connected with business activities.

5.2.5. Canadian-Polish Entrepreneurs Foundation (CPEF).

Origins and development 95. The CPEF, currently run from a head-office in Szczecin, was

officially established in May 1995, but started its operations in September 1997.The Government of

the Republic of Poland established CPEF as a separate legal entity, but the Ministry of Finance is

responsible for the establishment and control of the financial operations, while the Ministry of

Treasury is responsible for Supervisory Board Members appointments as well as control of the

overall operations.

In 1989 the Canadian Government dedicated CA$ 32 million to the Stabilisation Fund.

Since the Polish Government never used that, in 1992 the Canadian Government decided to change

the aim of the grant. Based on the Canadian experience, where Canadian SMEs are influencing

GDP growth as well as job creation, Canada proposed to dedicate the money for SMEs growth and

development. After 3 years of negotiations, finally Canada–Poland Entrepreneurs Program was

established. This assistance program was intended to support Poland’s market reforms by

encouraging the development of the Polish private sector through financial assistance to SMEs. In

1998 CPEF started its operations through the Program called “Branch Network” in co-operation

with Bank Pekao S.A. and, when a critical mass of clients was achieved, also a training and

consulting service started operating. In January 2000 Management Board of CPEF signed the first

agreements with the local Business Incubators under the “Canada Loan Program” and, from the 95 Information about CPEF’ s history and development have been sent by e-mail, at the author’s request, directly from CPEF’s Central Office.

92

following month, Incubators signed their first loan agreements. The network of Incubators had been

already established in the ‘90s, as a result of the Polish Government Program called TOR #10,

based on the “Know-How Fund for Poland” ’s funds, while others were settled directly by

communities or local associations. The latest inaugurated project is the “Loan Guarantee Fund

Program”, which began its activity in September 2001. The Canadian participation to CPEF will

endure until September 30th, 2003. Polish and Canadian Government decided all the same to

maintain the Program, which will be transformed into “Polish Entrepreneurs Foundation”.

Products and conditions. CPEF run four main support-programs, each referring to a

particular entrepreneurial target or need and always matched with training and advisory services

aimed at improving the management quality and efficiency of company operations. In general they

are designed for businesses employing up to 250 people at the maximum, but focusing on the class

from 5 to 100 employees, “with a solid strategy, but short of capital to implement it96”. The

entrepreneur must demonstrate a good knowledge of its industry and market, a clear plan about the

usage of the financial support from CPEF and an acceptable cash-flow projection. In return, CPEF

guarantees “a diversified and flexible financing, tailored to meet the needs of SMEs”. Right from

this introduction it’s easy to assess that we are now on a different level from the other examined

MFIs. Here the attention is completely drawn on business development and in no-way on poverty-

reduction goals. Is it still MicroFinance? In the author’s opinion, according to the definition of MF

given in chapter 3, only the “Canada Loan” Program and the “Polfund” Loan Guarantee Fund can

be considered MF programs, because they offer the possibility to micro- and small-entrepreneurs to

access financial services, despite their lack of worthy collateral, which are instead required for

issuing the other types of loans offered by CPEF, whose sizes are furthermore much larger.

However, here is a brief profile of the all 5 support offers by CPEF. Greater importance will be

given to the two programs identified as MF projects, but the second will be more in depth examined

in the next paragraph, under the loan guarantee programs.

The first program to be implemented and still operating nowadays is called “Branch

Network” Loan and has been carried out in co-operation with Bank Pekao S.A. It is addressed to

companies owning a relatively small capital and insufficient assets, and it offers them a “more

liberal approach to the project risk and the forms of loan repayment security”97. Broad is the range

of the facilities delivered: start-up loans; short - term operating loans; short – term investment loans;

middle – term tailored loans and long – term investment ones The benefits for the borrower lie in 96 Description of the products and their conditions is taken from CPEF web-site: www.cpef.com.pl. 97 Ibid.

93

the wide range of loan sizes, varying lending periods, a grace period in principal repayment,

negotiable interest rates, commissions and fees.

“Venture Loans”, the second pillar of CPEF’ s supply, are addressed to more mature businesses, that have been operating on the market for more than two years, which have reached the break-even point and expect a dynamic increase in their sales thanks to the financing of new projects, such as entering the export market or implementing a marketing plan for their products. Loan-offer tries to put together the characteristics of traditional lending and equity purchasing through two types of services: “Patient Loan” and “Participating Loans”, both with conditions depending on the success of the investment.

Finally we come to examine the real micro-loan program: “Canada Loan”. This program is

addressed to “companies which cannot use loan facilities offered by commercial banks due to the

lack of required banking loan security or bank’s ability to assume higher risk levels98” and is

implemented within the framework of selected regional Business Incubators, though the loan

characteristics are centrally established by CPEF. Incubators work as independent organisations and

are connected with CPEF by agreements of corporation. CPEF transfers money to the Incubators

Loan Fund from which the money is disbursed to SME clients. The amount is granted in order to

cover (entirely or partially) the costs of starting-up or expanding an already established business

activity, purchasing both working- or fixed-assets. The maximum amount reaches PLN 50,000,

while the “lending period is up to three years with a possible grace period of up to 6 months in

principal repayment”99. Commissions and fees are “negotiable”, while interests are floating and are

calculated for the entire period from loan approval to loan repayment. The minimum rate applied is

0,8 of National Bank of Poland’s rediscount rate rounded up / down to full interest points; the

maximum one cannot exceed the minimum rate of interest on SME loan plus 10 interest points100.

As a security, instead of a tangible collateral, a guarantee or blank bill of exchange is required as the

acceptable minimum.

Companies applying for the Canada Loan program must have been operating on the market

for at least three months and meet the other general conditions for all CPEF’ s loans, such as a good

knowledge of the business and the market’s needs or a solid operational strategy. The requirements

in terms of the company documents to be presented (REGON, NIP, registration etc.) are the same in

both CPEF and the Incubators, but the procedures in the latter are friendlier. The application form is

usually shorter, the business-planning document is not very wide, the employee together with the

SME finalises the application form. The fee is smaller, interest rates lower and negotiable. Usually

the amount is much lower than in banks – it starts from even 2.000 PLN, which in the Bank is

98 Ibid. 99 Ibid. 100 More detailed information about the Canada Loan program have been sent by e-mail, at the author’s request, directly from the CPEF’s central office.

94

treated as an individual loan. The average amount of the loan asked for by entrepreneurs is around

PLN 30,000 (six times higher than FWW’s ones) and is mainly used for investment purposes. Since

the beginning of this program in February 2001, 240 credits have been approved, for a total amount

of PLN 6 million101. The offer of the Polfund Guarantee Fund will be examined in the following

paragraph.

5.3. The Polish network of Loan Funds and Guarantee Funds.

Despite the scarce promotion of non-banking lending activities throughout the Polish

territory, the above mentioned MFIs are not the only ones operating in Poland. An extensive

network of about 71 institutions102, the so called Loan Funds, are active in granting loans at

favourable conditions for medium and, more commonly, small and micro entrepreneurs. Besides,

other 24 Guarantee Funds103 supplement the Loan Funds’ activity in supporting entrepreneurship.

These two kinds of institutions can be fully considered a part of the Polish microfinance network,

because of the size of loans and guarantees they issue and because of the target to whom they refer

their activity. The vast majority of the beneficiaries of these institutions are in fact people willing to

start or improve their business activities, but who are not able to obtain a loan from a traditional

banking institution due to their lack of adequate guarantees or professional experience required

from banks. In the next two subparagraphs the role of Loans Funds and Guarantee Funds operating

in Poland will be discussed separately. It must be borne in mind, all the same, that frequently the

same organisation runs both programmes and that PARP (the Polish Agency for Enterprise

Development) plays a significant role in the financing and support of both types of institutions.

5.3.1. The Polish network of Loan Funds.

101 Ibid. 102 Datum from the acts of the Conference “The use of available loan programs for micro and small entrepreneurs” held in Warsaw, 27th-28th August 2002, obtained by the author directly from PARP(Polish Agency for Enterprise Development). 103 Datum concerning November 2001 and gathered from the document “Report na temat dzialalnosci funduszy poreczen kredytowych w Polisce w okresie od 1994 r. do listopada 2001 r.” (Report on the issue of the activities of Guarantee Funds in Poland in the period 1994 – November 2001) (Polish language only), Krajowe Stowarzyszenie Funduszy Poreczeniowych (National Association of Guarantee Funds), December 2001, chart 1, p.12. Data from the mentioned document consider only those Guarantee Funds accredited to the National Associations, not excluding the existence of other such Funds which are not members.

95

In 1994 the Polish Labour Ministry received from the World Bank the conspicuous sum of

80 million US$, for the implementation of the programme “Promotion of Employment and

Development of Employment Services”. Within this project, a special module was created and

commonly called “TOR#10”, with the purpose of creating a network of MFIs in Poland, which

could lend money to micro-entrepreneurs and unemployed people in order to sustain the

development of entrepreneurship in the country. Initially some 30 Loan Funds were established by

the government without an independent legal form and their results monitored in the years 1995-

2001. It turned out that they had a very small impact on the population and the number of loans

granted was very low, around 3250, helping in the creation of only 6160 new jobs. In the meantime

other Loan Funds were established by local communities, often with the financial support of PARP

and other more were set up by private organisations or international donor institutions104.

According to the results of a recent research commissioned by PARP on the articulated

network of Loan Funds currently operating in Poland and presented in the conference “The use of

available loan programmes for micro and small entrepreneurs”, as of August 2002, 71 institutions

were active in distributing loans for undertaking or improving business activities, administrating 92

loan programmes105. They are spread on the entire Polish territory, though a strong concentration is

traceable in the South-western and Central part of the country, while Eastern regions, despite being

the poorest areas, are also the ones where the number of Loan Funds is the lowest106. According to

Mr. Kilianski, Director of Financial Instruments Unit of PARP107, that of Loan Funds is not a well-

organised and homogeneous network. Part of them operate only on a local scale and with a

restricted capital, while for others the lending activity is only a secondary programme and they

concentrate on other aspects of entrepreneurship support (local/regional promotion, business-

advice, training etc.)108. Only lately (in November 2002), a not very conspicuous part of them

(about 20 lending institutions) has decided to reunite into a National Association of Loan Funds and

to start common initiatives to improve their activities and their visibility.

All together, the 71 institutions manage funds for the value of 366,9 million PLN (over 91

million US$) employing full-time about 930 persons. Not only their geographic disposition, but also

the distribution of their capitalisation is rather unbalanced: on the total capital of ca. 270 million

PLN ( around 67,5 million US$), the four biggest funds administrate over 65% of it. These are the 104 From a personal interview with Mr. Marcin Fijalkowski, MFC Legal and Regulatory Program Coordinator and MFC interlocutor for the Polish governmental project “Capital for Entrepreneurs”, held at MFC in November 2002. 105 See note 102. Within this number also Fundusz Mikro, Inicjatywa Mikro and FWW are included. 106 See map of their distribution in the acts of the already mentioned conference (August 2002). 107 From a personal interview with Mr. Kilianski, Director of Financial Instruments Unit of PARP, held in the PARP Central Office, Warsaw, December 2002. 108 According to Mr. Kilianski, for most of the considered institutions the loan activity doesn’t represent more than 10% of the total operations.

96

already described Fundusz Mikro (80 million PLN), the Enterprise Fund RWP (49,8 million PLN),

GARR S.A. (36, 2 million PLN) and the already presented FWW (Rural Development Foundation)

with 10 million PLN. The funds are very different in their legal form, structure, methodology and

source of financing. Only 11% of them draws financial base from foreign donors, 22% draws its

major resources from self-financing, the largest part of them (42%) receives capital from the state-

budget (whether local government or provinces) and one every four collect funds from other

sources such as private sponsors, associations, foundations or other activities109. PARP (Polish

Agency for Enterprise Development) has been playing since 1999 a more and more considerable

role in the financing of these funds through the setting up of a special annual competition among

them, in order to assign additional capital to the winning institutions110. In 2002 around 20 million

PLN were provided to improve the capitalisation of the best performing funds. According to Mr.

Kilianski, the problem of under-capitalisation is actually the most critical one for Loan Funds,

which, differently from Guarantee Funds, effectively use a considerable part of their capital, usually

around 80-90%111.

There is no unique set of requirements to obtain a loan from Loan Funds, it depends on the

nature of the programme run by the single institution to which the entrepreneurs applies for. There

are i.e. special credit lines for creating new jobs for unemployed workers previously employed in

the steel or coal sectors; other loans are exclusively provided to students who have just graduated

from university and are willing to start their own business activity; there are loans for unemployed

people and for the technological innovation of companies. Every programme has its special criteria

according to its specific mission. However, most of Loan Funds require formal guarantees like

pledges, mortgages, guarantees extended by other financial institutions (i.e. Guarantee Funds) or,

most commonly a blank promissory note issued by the borrower112.

109 These latest data must be carefully considered. Percentages are actually calculated on the number of institutions and not on the size of their capital. Thus, i.e. only 11% of Loan Funds gather funds from foreign institutions, but the share of capital disbursed by foreign donors is certainly higher than 11%. Just to get an idea, Fundusz Mikro’s capital alone (received from the Polish-American Enterprise Fund) accounts for almost 30% of the entire capitalisation of all funds. 110 The requirement for accessing this competition are, according to the author, too bureaucratic and they don’t always take into account the real effectiveness of some MFIs, which, despite their very good performances, could never obtain a support from PARP only for formal constraints. Two examples are Inicjatywa Mikro and FDPA, which more times applied for additional capital from PARP, but they were always refused. The former was considered illegible because of its legal form of Limited Liability Company, while PARP can only give funds to not-for-profit institutions. It is all the same well-known that IM don’t get any profit from its activity and the form of LLC was the only choice available for them. FDPA, on its side, was refused a support because in its statute there was no formal declaration of the institution’s commitment to entrepreneurship development, though actually FDPA is one of the most active organisation in this field especially in rural areas. 111 From a personal interview with Mr. Kilianski, Director of Financial Instruments Unit of PARP, held in the PARP Central Office, Warsaw, December 2002. 112 Ibid.

97

According to the already mentioned research113, the minimum size granted by Loan Funds

amounts to 1,500 PLN, but for some of them there is no minimum sum. The average loan size

reaches some thousand PLN (usually 11,000 PLN), while the institution granting the highest sum

gets to 315,000 PLN. Most of them are investment loans up to three years. The range of interest

rates established by the different Loan Funds is very wide: 4 programmes set their interests at a

higher level than commercial banks, in 8-10 cases interest rates are in line with banks, while the

remaining institutions decided to provide loans with preferential terms (that is, interests under the

commercial level). On the total capital of 702,2 million PLN disbursed so far, through about 64,000

loans, little more than 11% of it was not paid back 90 days after the due period. Most “bad loans”

revealed to be those with preferential rates, proving that the more similar is the rate to commercial

ones, the fewer are unrecoverable loans114.In Mr. Kilianski opinion, some MFIs like Fundusz Mikro

or Inicjatywa Mikro, can obtain much more appreciable repayment rates because they provide

short-term loans without any grace-period. In this way they reduce the risk of turning the loan into a

“bad loan”. Besides the practice of group-lending and the tight monitoring of clients stimulate the

on-time repayment.

Both Mr. Kilianski and Mr. Fijalkowski, MFC Legal and Regulatory Program Coordinator

and MFC interlocutor for the Polish governmental project “Capital for Entrepreneurs”115, complain

that, in general, Loan Funds’s performances, especially of the smallest ones among them, are not

satisfactory and should be improved. In particular, Mr. Fijalkowski identifies their main problems in

their often unprofessional and unskilled operators, their constant under-capitalisation, the small

number of loans granted, the relatively big sums of money for each loan, the lack of promotion for

their activities and the lack of incentives to improve their performances116.

5.3.2. “Capital for Entrepreneurs”.

In order to solve the problem of financing, both for the entrepreneurs and for the Loan Funds

instituted to support entrepreneurship, the left-wing government elected in 2001 has recently

elaborated a special plan called “Capital for Entrepreneurs” and constituted a special task-force to

develop the crucial criteria for implementing the programme. Works started in mid-2002 under the

113 The reference is to the research commissioned by PARP and whose results were presented during the conference “The use of available loan programmes for micro and small entrepreneurs”, August 2002. 114 Data from the acts of the Conference “The use of available loan programs for micro and small entrepreneurs” held in Warsaw, 27th-28th August 2002, obtained by the author directly from PARP(Polish Agency for Enterprise Development). 115 More about this project in the following sub-paragraph. 116 From a personal interview with Mr. Marcin Fijalkowski, MFC Legal and Regulatory Program Coordinator and MFC interlocutor for the Polish governmental project “Capital for Entrepreneurs”, held at MFC in November 2002.

98

auspices of the Ministry of Economy and with the high participation of PARP and BGK (the

National Bank of Economy117). The original plan was to create a network of 116 Loan Funds,

keeping as a base the existing ones: 16 of them would be Regional Funds directed to medium-size

enterprises, the remaining 100 would be small Communities Loan Funds, sort of local MFIs which

would grant only small loans. As soon as possible only the most active, effective and dynamic ones

would be backed by state subsides through PARP’s grants, the others abandoned to their destiny.

The budget would consist of 560 million PLN (more than 125 million Euro) and it would serve for

four years. In 2002-2003 the amount of money would be smaller, while in the following 2 years the

budget would be larger, thanks to the foreseen accession to EU and to its funds118. MFC

representatives suggested that the 16 Regional funds would probably compete with existing banks

and that their role would be redundant and useless. The suggestion was approved and the creation of

these institutions was cancelled from the plan119.

PARP officials, in co-operation with MFC staff, are currently elaborating standard

requirements for Loan Funds. These criteria should regulate both the lending services provided by

Loan Funds (to assure that funds are allocated according to an established formal basis like banks

have to do) and the issuing of grants by PARP to best-performing institutions which fulfil the

required standards. PARP’s intention is that of including in this document all the formal procedures

for delivering all different kind of grants provided, in order to guarantee a clearer and homogeneous

regulation for all the activities of the Agency120. Conditions for receiving financial aid from PARP

would concern the human-resources employed in the Loan Funds and their professional qualities,

the procedures used to assess the granting of loans, the minimum level of capitalisation required (2

million PLN was the sum proposed, but MFC representatives suggested its increasing), a limitation

to the maximum amount allowed for each loan and some other financial requirements which are

still to be worked out121.

As far as the initial capital is concerned, each institution will have to collect its own starting

funds and the capital to cover its operational costs; the financial support from the state must be

actually used only to increase the loan capital. After around one year of operation, PARP will have

to judge on the meeting of all requirements by new and old Loan Funds. In case of success the

examined MFI won’t have to pay the money back to the state, otherwise it will have to. This

117 Not to be confused with the BNP, the Polish National Bank. 118 To tell the truth Mr. Fijalkowski maintained that the budget was quite unrealistic and it was not very likely that the government could afford such a big expense. 119 From a personal interview with Mr. Marcin Fijalkowski, MFC Legal and Regulatory Program Coordinator and MFC interlocutor for the Polish governmental project “Capital for Entrepreneurs”, held at MFC in November 2002. 120 Ibid. 121 Ibid.

99

procedure is not new, as a matter of fact it has been in use for the last three years, but the

requirements were so easy to meet that almost every Loan Fund could do it and there were few

incentives to improve the performances year after year. Formal criteria and standards will need to

be approved by the Minister of Economy and then turned into a government decree to become

effective122.

5.3.3. The Polish network of Guarantee Funds.

Development and structure. As already introduced in chapter 4, the Polish network of

Guarantee Funds extends itself on two levels: the nation-wide scheme of BGK (Bank Gospodarstwa

Krajowego, the National Bank of Economy), and the local or regional independent Guarantee Funds

established throughout Poland. Since, contrary to the general expectations of BGK managers, the

local and regional networks revealed more efficient in providing guarantees in the areas of their

operations than the national branches of BGK, in 2000 a special Act was passed in Parliament

allowing BGK to provide direct contribution to the regional or local Funds buying some of their

shares123.

The first attempt to set up a system of Guarantee Funds was undertaken under the PHARE

Local Initiative programme in 1994. Under this project, eighth funds were set up with capital from

500,000 PLN to 1.2 million PLN. They operated within Regional Development Agencies and

usually covered one or few communes. All of them had to sign agreements with local banks willing

to co-operate and, as of the end of 1996, they had already provided 500 guarantees always

operating on a local scale124. The BGK Credit Insurance Fund was established one year after, in Fall

1995, while the fund was given a statutory rank and the name of “Guarantee Fund” (Fundusz

Poreczen Kredytowych) in 1997. At present it represents the largest guarantee fund in Poland

according to its capitalisation and the value of guarantees issued. BGK has subscribed agreements

with an extended network of banks and has elaborated uniform procedures for the branches

operating on the whole country. Besides individual guarantees, BGK issues also special “wallet-

guarantees”: in this case the guaranteeing institution does not review individual application for

guarantees, but instead it guarantees the entire portfolio of loans provided by the co-operating banks

to clients meeting specific conditions. The Guarantee Fund provides also special guarantees for

students. 122 Ibid. 123 From a personal interview with Mr. Kilianski. 124 See the article by STYCZEK D. “Big words, small actions” on the Warsaw Voice, 18th May 1997.

100

As a result both of the support of BGK to the development of Regional and Local Funds and

of the contribution of private foreign donors (such as the Polish-British Programme for

Entrepreneurship and the Canadian-Polish Enterprise Foundation), in November 2001 there were 24

Funds running guarantee schemes in Poland, but several new initiatives were about to start125. A

neat division between Regional and Local Funds is nowadays more and more difficult, because

more and more funds are trying to expand their scale. There is no doubt that a regional scale calls

for a well-structured distribution scheme, in order to deliver guarantees also in remote areas trying,

at the same time, to contain the costs. For this reason Regional Guarantee Funds usually tend to

build their own delivery networks opening windows or establishing co-operation with Local Funds.

As of November 2001, the total capital owned by the 24 GF amounted to almost 54 million

PLN, but its distribution was not at all homogeneous. The newly established Pol-Fund (managed by

the Canadian-Polish Enterprise Fund) had the largest capital at disposal (16 million PLN), while

second in the ranking were the two GF created under the Polish-British Programme for

Entrepreneurship in Lublin and Bialystok with 8 and 9 million PLN respectively. Other local funds

didn’t exceed 2 million PLN (with only two exceptions), most of them not even reaching one

million.

Functioning, target and usage of guarantees. The efficient functioning of a Guarantee Fund

network requires a tight co-operation between Guarantee Funds (GF) and lending institutions

(regular banks or Loan Funds). Every GF usually signs agreements with different banks. This

contracts regulate in details a wide range of issues such as the scale of available guarantees, the

determination of the “capital multiplier”, the exchange of information between the two institutions

and the procedure for eventually exacting the guarantee. In particular the “capital multiplier” is a

good proxy for the degree of mutual confidence between the bank and the GF and for the good-

reputation of the GF. It is in fact a quantity that describes the ratio between the maximum value of

the guarantees that the GF is allowed to issue on the total capital owned by the Fund itself126. In

case of Polish GFs, capital multiplier are quite low, reaching only figures of 2 or 3. The situation of

generalised under-capitalisation of guarantee funds is tightly connected with the definition of

“capital multiplier” by banks. If banks allowed for a higher ratio of capital multiplier, GF could

issue a higher value of guarantees owning the same amount of capital. 125 Data from the document “Report na temat dzialalnosci funduszy poreczen kredytowych w Polisce w okresie od 1994 r. do listopada 2001 r.” (Report on the issue of the activities of Guarantee Funds in Poland in the period 1994 – November 2001) (Polish language only), Krajowe Stowarzyszenie Funduszy Poreczeniowych (National Association of Guarantee Funds), December 2001, p. 4. 126 Here it is given an example: a capital multiplier equivalent to 3 means, in few words, that a GF is allowed to issue guarantees for a value not overcoming three times the total value of its capital.

101

Guarantees are generally issued in order to cover up to 60-70% of the sum applied for by the

borrower to the co-operating bank. A guarantee under 50% of the loan wouldn’t be attractive

enough for the bank, while a coverage of 80% would be too risky for the Guarantee Fund and could

generate problems of moral-hazard with the borrower. An individual model of running GF usually

prevails among Polish funds, while wallet-guarantees are still rare, despite their lower

administrative costs.

Guarantee Funds are usually unspecialised, that is, they don’t assume any specific group of

entrepreneurs as their target. Small and micro entrepreneurs represent however the vast majority of

their clients. The activity of most of them deals with trade (42%), one out of five is in the field of

production, a 5% in the agricultural sector, a marginal 3% in construction while the remaining 30%

operates in the service sector. More than half of guarantees are granted for investment loans (51%),

but a good 27% is used to cover loans for the purchase of equipment, another 12% for buying or

renovating real estates and 10%, for the purchase of vehicles127.

Performances of Guarantee Funds. On the total number of 24 active GF (as of November

2001), the institutions having delivered more than 100 guarantees were only 7 (one with more than

500 and two others with over 300), while the same number of GFs still hadn’t issued more than two

guarantees128. The total value of guarantees issued amounted to 114 million PLN with the two funds

managed by the Polish-British Programme for Entrepreneurship at the top of the ranking and all the

others lagging far behind129. Thanks to the 2233 guarantees conceded by GFs almost the double

value of credits was extended to entrepreneurs (226 million PLN), while little over 1.4 million PLN

had to be paid to banks to refund “bad” debts. The average value of the guarantee was of 51,000

PLN. More updated statistical data are available only for Pol-Fund, which is however the largest

private GF in Poland, and one of the youngest too. It was founded in November 2001 with a starting

capital of 16 million PLN and shares equally divided between CPEF and Bank Zachodny WBK.

After one year of activity 140 guarantees were delivered on a total of about 200 applications. The

average guarantee, as of November 2002, amounted to 107,000 PLN (the total value almost reached

127 Data from the document “Report na temat dzialalnosci funduszy poreczen kredytowych w Polisce w okresie od 1994 r. do listopada 2001 r.” (Report on the issue of the activities of Guarantee Funds in Poland in the period 1994 – November 2001) (Polish language only), Krajowe Stowarzyszenie Funduszy Poreczeniowych (National Association of Guarantee Funds), December 2001. table B-2, p.53. 128 For the sake of precision, it must be added that out of 24 GFs, 6 of them had been operating for only one month. Among these we find Pol-fund. Data from ibid. table B-1, p. 52. 129 The two funds of Lublin and Bialystok granted guarantees respectively for 42.5 and 38.2 million PLN. No other funds issued guarantees for more than 10 million PLN while 11 of them didn’t even reach the amount of 1 million PLN.

102

15 million PLN) and none of the guarantees issued required a vindication process by Bank

Zachodny, thus showing an excellent credit-worthiness assessment process130.

A good proxy of the efficiency of a GF is given by the ratio between the total value of the

guarantees released and the value of total capital available. Among all the funds, as of November

2001, only 5 of them issued guarantees for a value higher than the capital at their disposal, with the

GF of Olsztyn showing a good performance of 264%, while, among the 16 having operated for

more than one year, six of them didn’t even use half of their funds and other five didn’t reach

100%, though exceeding 50%131. Pol-fund, after only one year of activity, shows on the contrary a

well-promising ratio around 93%. If the major problem for Loan Funds is their under-capitalisation,

Guarantee Funds suffer from a lack of demand for their precious services which should be perhaps

better promoted among entrepreneurs.

Main problems and current issues. The problem of self-financing is very important for

Guarantee Funds, because the capital offered by the state through PARP, by BGK or international

donors is usually granted as additional lending capital, but not available to cover operational

expenses. Besides, the larger is the capital at the fund’s disposal, the more credible will be the fund

at the bank’s eyes. Thus a challenge for GFs is that of raising additional funds at least to cover

administrative costs. Internal incomes derive from two main sources: first, the commission fee on

the granted guarantee (usually a 2% of the value of the guarantee) and second, interests from bank

deposits. On the other side, primary expenditures are split between administrative costs (salaries,

renting, professional training etc.) and costs connected with unpaid credits, for which banks ask for

the due guarantee. The problem is recently getting worse and worse because interest rates on

deposits are rapidly decreasing while unpaid debts are slightly increasing, due to the difficult

macroeconomic situation in the country.

Another primary problem for GF is that of capital losses due to the request from banks to

pay the agreed guarantee in case of unrecoverable loans. To tell the truth, as of November 2001, the

average percentage of losses on the total value of guarantees issued was only of 1,25%, but some

funds reached a much more considerable quota (5, 8 or 9% up to 18%)132. On the one side, a GF

130 Data about Pol-Fund have been sent by e-mail, at the author’s request, directly from the CPEF’s Central Office. 131 Data from the document “Report na temat dzialalnosci funduszy poreczen kredytowych w Polisce w okresie od 1994 r. do listopada 2001 r.” (Report on the issue of the activities of Guarantee Funds in Poland in the period 1994 – November 2001) (Polish language only), Krajowe Stowarzyszenie Funduszy Poreczeniowych (National Association of Guarantee Funds), December 2001 table B-3, p.64. 132 Data from ibid. table A-3, p.50.

103

must, by definition, take higher risks than a bank and therefore higher losses are justified too. On

the other, losses reduce the fund’s capital, putting at risk of paralysis the entire activity of the GF133.

One more considerable matter for Guarantee Funds, especially for the smallest ones,

concerns the lack of a separate and independent accounting from other activities run by the same

institution. A separate accounting is in fact crucial for assuring a complete transparency in the

allocation of funds and for enhancing the credibility of the GF itself. The lack of transparency is

certainly a real barrier to the effort of drawing capital from public or international institutions.

Actually the presence of a separate accounting system in a GF is one of the conditions to apply for

additional capital to PARP, but not many Guarantee Funds can fulfil it.

5.4. From former state-farm worker to microfinance client: need or will?

The attempt of this paragraph is that of describing the factors that foster the passage of an

hypothetical former state-farm worker, typical target of microfinance programs, especially FWW,

from his old life-style of salaried worker, through a period of unemployment, to a new life condition

of self-employed or real entrepreneur and what pushes him to turn to microfinance institutions for

credit.

7.4.1. The conditions of state-farm workers.

State-farm workers were deeply shaped by the experiment of the “real socialism” and were

perhaps the most typical result of it. In the People’s Republic of Poland there were more than 1,600

state-farms, on which 500,000 people worked and lived with their families. After the collapse of

most of them and the attempt of privatisation from 1991 to 1993, about 100,000 people became

unemployed134 with all the destructive consequences of it that we’ll consider in the next sub-

paragraph.

State-farms, and state-owned companies more in general, besides being centrally controlled

and administered according to political and not economical, rational criteria135, didn’t only convey

an economical return in exchange for the selling of the worker’s labour-force, but represented also a

133 It’s worth reminding that part of losses (usually not very conspicuous, to tell the truth) can be regained by the GF through the blank bill of exchange that clients have to present to the GF as a guarantee. 134 see TARKOWSKA E. “An underclass without ethnicity: the poverty of Polish women and agricultural labourers” in “Poverty, Ethnicity and Gender in Eastern Europe during the market-transition” edited by EMIGH J. R. and SZELENYI I., 2001, p. 105 and following. 135 See BALCEROWICZ L.: “Socialism, Capitalism and Transformation”, edited by Central European University Press, Budapest, 1995, p. 99-100.

104

“real welfare state”136. This paternalistic approach, brought on by the state plan administrators,

generated a series of official or shady benefits and profits which permitted to regularly satisfy all

the basic needs of the worker and his/her family: a secure eight-hours work (a luxury in agriculture)

with a sufficient salary, a guaranteed free accommodation, a plot of land, the permission to breed

one or two farm animals by one’s own, special allowances and price cuts on basic goods, free

transportation and various chances for small theft from the farm stocks. Such an artificially

protected environment hid also a pathological side: “the state farm populations were characterised

by atomisation, conflicts and alcoholism”137, while working on state-farms lacked any social

prestige and attracted poorly qualified workers generating a perceived marginalization. The results

after many years of such a life were a passive attitude towards their lives, a “learned helplessness

and related phenomena of self-restraint and lack of self-preservation”138: people lacked any capacity

of independent stance, because their everyday life required none, no personal decision was required,

family life was completely dependent on the state-farm infrastructure. Furthermore, the spatial

isolation of state-farms from medium-sized or big towns generated a sort of “imprisonment in the

locality”139 e didn’t allow any comparison with the rest of population’s average lives. Unluckily,

this kind of spatial imprisonment is still present nowadays, because residents of rural areas often

cannot afford to move to big towns where housing shortage has driven up housing prices140, while

the costs (in temporal and monetary terms) of commuting every day from the countryside to urban

areas are often unbearable for low-salaried workers141.

7.4.2. After the collapse.

The closure or restructuring of most of state-farms and companies after the beginning of the

transition process, brought about critical consequences for all those people employed for many

years in such work-places and accustomed to such a comprehensive and all-absorbing system.

According to “The Transformation of State Farms in Poland” by Jerzy Wilkin142, 72% of the

respondents to his survey stated that, after transformation, they were worse-off (and 52% added

“much” worse-off ) than before. “State-farm poverty” puts together all the features of the

136 See TARKOWSKA E., 2001, p.106. 137 Ibid. on page 105. 138 PEREPECZKO B: “Towards normality. Remarks from research on privatisation of state-farms”, 1994. p. 70-77. 139 See TARKOWSKA, 2001, p.108. 140 See OECD document GD(96)40: “Microcredit in transitional economies”, LEED program, Paris, 1996 on page 46. 141 See BOERI T., BURDA M.C. and KOLLO J. “Mediating the Transition: Labour Markets in Central and Eastern Europe” Center for Economic Policy Research, edited by Ambrus-Lakatos and Schaffer M.E., London 1998, p.20. 142 See WILKIN J. “The transformation of state-farms in Poland in view of local authorities and inhabitants of state farms settlements”, p. 44-75 in “The people and the land after the collapse of the former state-farms. Sociological and Economic Analysis.” Edited by KORAB K., Warsaw, 1997.

105

commonly called Polish “new poverty”, such as high unemployment, low level of education, large

family size and living in rural areas, with the peculiar legacies of having worked and lived in the

state-settlements environment for a long time. Most influencing outcomes are143: 1) a sudden lack

of job and income sources; 2) the consequent generation of a new dependence (no more on state

farm welfare, but) on social assistance and benefits (“Maybe social assistance won’t let us die”

stated one interviewee)144; 3) pathological phenomena, such as participation to the shadow

economy, committing of small crimes, alcoholism; 4) a pervasive uncertainty as a basic dimension

of life, which generated a short-term perspective characterising everyday operations and even the

conduction of an eventual business activity145; 5) a lack of prospects for young people, especially

for those living in rural, isolated areas with no possibility of getting more than an elementary

education; 6) a lack of interest for political and social issues, as if nothing could change their

situation in any way.

In such an environment, those willing to commit to putting up any self-employing activity

are very few, while the rest tends to complain about external factors, that, in their opinion, prevent

them from starting a new, better life, not even mentioning their personal shortcomings like the lack

of qualifications or of good ideas and courage for settling a business146. People complain about high

social insurance payments (ZUS) which increases the costs of labour and pushes them to turn to

illegal employment; about economic recession which causes lack of demand and cash-flow

problems forcing firms to fire their workers; about very low wages or sometimes even pay in kind;

about new capitalists (often from abroad) illegally employing local, young (even in school-age)

workforce and paying them a misery (PLN 2,5 per hour), instead of regularly hiring former state-

farm workers currently unemployed147. This already unfavourable environment has been still further

spoilt by passive unemployment policies, deceptive active work policies, which provided works

which turned out to be a fiction, and an irrational provision of zero-interests credits, excellent basis

for corruption and raising of false expectations148. “State interventions aiming at fighting the

symptoms, rather than principles underlying the problem (have) made the local people even more 143 See TARKOWSKA 2001 p.105-108. 144 See TARKOWSKA E. “Old and new shapes of rural poverty in Poland: the former state-farm worker’s family”, p.44-57 in “Past and present poverty “ edited by KUSA Z., Bratislava, 1997. 145 See OECD document GD(96)40: “Microcredit in transitional economies”, LEED program, Paris, 1996 on page 28, where it states that “entrepreneurs [of transition economies] tend to focus on short-term profit opportunities rather than building long term sustainability” 146 see Center for Social and Economic Research (CASE Foundation): “Demand for Microloans in Poland, Synthesis of Research Results”, Warsaw, September 2001, p.15. 147 the list of complaining is taken from MFC Report “Poverty, Microenterprise and Microfinance in the Eyes of the Rural Poor in the Region of Northwest Poland” (draft-version) by PAWLAK K. and MATUL M., Warsaw, 2002, p.15. This last complain has been further confirmed by Mr. Kopanski, FWW’s Inspector, during a personal interview held in Warsaw in December 2002. 148 See also MFC Report “Poverty, Microenterprise and Microfinance in the Eyes of the Rural Poor in the Region of North-west Poland” (draft-version) by PAWLAK K. and MATUL M., Warsaw, 2002.

106

addicted to their help, which, at the same time, decreases the possibility to really help them” They

are not given any chance to try and cope with everyday obstacles and to develop a strong capacity

of overcoming them. “As a result, people are living in apathy, laziness and idleness. They are

hopeless, not motivated and unwilling to do anything. They feel having been cheated”149.

Besides, strong negative prejudices have been developing, on the one side, against former

state-workers (for their living on state assistance and continuous complaining) and, on the other,

against people who succeed in starting up any business and making money out of it; these latter are

often thought to steal, not to follow regulations or to live on credit150. From the MFC research on

poor population in the Northwest Poland, a impressive picture comes out: a good 33% of members

of local communities interviewed are perceived as belonging to the class of “the poorest”, living, on

the average, in numerous families (with 5-7 children), with a state-work past and an older age. They

do not have any regular source of income, except for a symbolic help from the state welfare, are

entrapped in poverty and sometimes pushed to steal to survive. This seems to be an extreme

situation, but another 30-49% of people living in the same rural areas recognise themselves as

“poor”. Belonging to this class are salaried workers (often illegally hired), unemployed receiving

unemployment benefits, living alone pensioners and individual farmers with no access to state aid.

They enjoy a stable source of income, though very low, which allows them only to satisfy their

alimentation needs. The conventional opinion of ex state-workers absolutely deserving their

situation need to be abandoned, also because only the 19% of the unemployed people living in the

countryside (42% of the total) enjoys the right to unemployment benefits151.

7.4.3. The birth of entrepreneurship.

Despite the prevailing group of respondents to the MFC research in the area of Northwest

Poland152 (where a huge mass of ex state-farm workers is concentrated) thought there was no

potential for setting up any economic activity and expressed their preference for a salaried work, a

meagre remaining part (often FWW’s clients) declared they could find some potential for tourist

service activities or other small services like car-repairing, tailoring, tiling etc. But the most

interesting question concerns the reasons why some of them actually decided to put up a business

activity on their own in spite of the many obstacles they do identify (like the scarce demand for

goods, the unfavourable legal framework, the lack of capital and so on). These motivations were

investigated by the MFC staff through two focus groups. The result was surprising: the highest

149 Ibid. on page 16. 150 Ibid. on page 19. 151 Data from FDPA: Rural Development Report: “Rural Poland 2002.”, Warsaw, 2002, table A13. 152 Ibid.

107

ranked reason for setting up a self-employing activity was given by the lack of salaried work,

implying that they would have preferred any other kind of salaried activity and (even a permanent

state unemployment benefit) rather than settling their own business. It was therefore poverty and a

willingness to improve their and their families’ living standard that forced them to turn to self-

employment, not, primarily, a conscious need for independence and self-realisation. This confirms

that the experience of state-farms and the related passive attitude has deeply shaped their mind and

is still effective. Furthermore, none of the respondents mentioned “satisfaction from work” even

once, probably because in their past working experience in state-farms they never looked at work

but as a means to get all the connected extra-benefits153. A countercheck is that a similar research on

a different sample composed of micro-entrepreneurs living in towns over 100,000 inhabitants and

not related with state-farms got to the opposite result: “directly asked micro-entrepreneurs usually

give two reasons for establishing a company: (1) a wish to be independent, to realise one’s own

ideas and (2) a wish to increase one’s own income […] Reasons of a protective character take only

the third place”154. In the MFC research, the “need for independence” was instead mentioned by

interviewees on an inferior level of importance, but was expressed “in a sense of not relying on

anybody, as they do not trust each other”155.

7.4.4. Why do they turn to microfinance?

Assessed that setting up an entrepreneurial activity is for an ex-PGR (it stands for

“Panstwowe Gospodarstwo Rolne”, state-farm) worker a last chance to survive in decent

conditions, it is worth now asking how come they turn to MFIs and, in particular, to FWW, which

focuses its activity on them.

First of all it is useful to analyse their attitude towards credit borrowing, which is not taken

for granted. From the already mentioned MFC research, it turns out that credit is most commonly

perceived as a burden, to be undertaken only in case of emergency, even when running a business.

It actually frightens the respondents, because of their constant insecurity about the future, because

of the swinging interest rate’s trend and because they fear losing everything they have as a 153 an interesting observation is added by MFC staff in the already mentioned research on page 26: “The logic of the relative importance of incentives is the same as in the Maslow’ s pyramids. Until the basic needs of life have not been satisfied, people will not even try to think about self-realisation and pleasure.” 154 from Center for Social and Economic Research (CASE Foundation): “Demand for Microloans in Poland, Synthesis of Research Results”, Warsaw, September 2001, p.12. 155 from MFC Report “Poverty, Microenterprise and Microfinance in the Eyes of the Rural Poor in the Region of Northwest Poland” (draft-version) by PAWLAK K. and MATUL M., Warsaw, 2002, p.25-26, where we can also find the following statement: “In the environment of jealousy and complains, considering entrepreneurs as thieves – it is difficult to become motivated to do anything when you cannot rely on anybody and any behaviour different to this of other people from local community can be met with social disapprobation.”

108

consequence of a business failure. Another interesting attitude is their thinking that credit should be

interests free and that repayments should be cancelled in case of success of their entrepreneurial

attempt. This is a result of the short-sighted government’s help based on subsidised loans or totally

free grants which spoiled the lending system of that areas. Given their need for financing, potential

entrepreneurs recognise the existence of various sources of credit. The most commonly mentioned

are: commercial banks, Hire Purchase Agencies, Labour Offices, FWW, pawnbrokers, money-

lenders, family and friends; but other informal possible ways to get some financing are selling

assets and working abroad too. A drastic fall in personal savings is also to be noticed, this fact

hasn’t been followed by a reduction in expenditures, but rather by “a struggle to keep the same level

of standard of living in the circumstances of decreasing real income”156.

Banks, very popular 10 years ago among state-farm workers because of their low interests

and simple requirements, are now completely inaccessible for them, because of their high collateral

requirements, on the bank’s side, and the lack of any formal and permanent source of income on the

ex-state workers’ one, who are not perceived as credible people and are badly treated by the bank’s

staff. Hire Purchase Agencies, on the contrary, currently represent the most popular source of

financing MSEs (Micro-Small Enterprises) for various reasons like their extensive promotional

activity, their customer-friendly procedures and requirements (only one page application, not to be

filled out again for a subsequent loan) and the impressive speed of disbursal (it can take only 15

minutes from the signing of the application to get the sum of money required). Besides, they are

fairly accessible to the poor (but not to the “poorest”) and completely open to the “not so poor” and

“rich” categories157. Families and relatives have always constituted a stable source of financing, but

recently their support has become smaller and smaller and often insufficient to sustain a business

activity. Besides, “poor” people often come from equally poor families, that’s why this informal

source of credit is a valid assistance only for “not so poor” class. Poor rather prefer to ask for credit

to neighbours and friends living in the same setting and most likely to share their same problem in

case of emergency. Labour offices are instead losing their popularity because of the current lack of

government’s funds to issue loans158, otherwise they would be highly appreciated in reason of their

“subsidised interest rates and the writing off of 50% of the loan when successfully repaid”159.

Pawnbrokers and selling assets, though inconvenient means, are more recently raising a great 156 Ibid. on page 32. 157 The four categories of the “poorest”, the “poor”, the “not so poor” and the “rich”, result from the self-perception of interviewees and not from quantitative economic indicators. 158 The percentage of Labour Funds expenditures for loans was 2,9% in 1999 and only 1,7% in 2000, while 82% of funds were spent for unemployment and pre-retirement benefits. Source: Central Statistical Office (GUS): “Yearbook of Labour Statistics 2001”, Warsaw, 2002. 159 Taken from MFC Report “Poverty, Microenterprise and Microfinance in the Eyes of the Rural Poor in the Region of Northwest Poland” (draft-version) by PAWLAK K. and MATUL M., Warsaw, 2002, on page 33.

109

success as entrepreneurs’ last source of financing their business, especially for the worst-off among

them.

Once examined the most popular alternative sources of capital, we get to analyse what

incentives bring former state-farm workers, now become entrepreneurs for need, to join a micro-

loan program and the FWW one, in particular. Both current and new FWW’s clients were

interviewed about the strengths that brought them to join the micro-loan program and the most

recurrent were selected and ordered through a pair-wise ranking. The final ranking of the incentives

shows the “access to credit” as the most important factor, meaning that for some of the clients

FWW represents the only available source of financing their newly born activity. To this group

belong especially the “poor” and the “not so poor” classes but the “poorest” one remain excluded all

the same. “Access” means for clients also the possibility to get a permanent source of capital and a

number of repeated loans. Second most important incentive is the presence and collaboration of

loan-advisors, whose role is much appreciated by customers. Advisors not only help in operational

terms, like with the drawing of the business-plan or reminding repayments deadlines or collecting

them door-to-door, but also convey motivation and self-confidence in people who, as we examined,

are not accustomed with entrepreneurship and its burdens. Only at the third place we find “interest

rates” which, for FWW, are lower than banks’. This is a surprising result because it proves that rural

people and ex state-farm workers in particular appreciate more other high quality facilities than the

price of the loan itself, thus showing that they could be perhaps able to manage loans at commercial

rates. Other following factors highly valued by clients are the easy procedures, the less requirements

(including the solidarity groups), the existence of a grace period, the fast loan disbursal, the

possibility of getting a reimbursement of ZUS (social insurance taxes) paid by ex-PGR workers and

the training courses.

Comparing FWW with the other two most common alternative sources of capital, i.e. banks

and Hire Purchase Agencies (HPAs), it turns out that, in the product delivery characteristics, FWW

has a comparative advantage in access, proximity, advisory and customer commitment, while HPAs

are better in the promotion activity, in the fast disbursal and in the more friendly and easy

procedures and requirements; banks don’t offer any comparative advantage in this field. It seems

therefore that FWW is considered a second best solution, but in reality it stands out for one

important difference: having a social mission, it doesn’t exclude by definition poor people, as

HPAs, with their market-oriented vision, do. Nonetheless both banks and HPAs, right thanks to

their commercial approach, can afford a long-term strategy and a non-restricted access to capital,

which FWW lacks. As far as the product terms are concerned, the only element that, in the eyes of

110

clients, is more advantageous in FWW’s loans are their lower interests; HPAs are the one source

having the most convenient guarantee system (for small-sized loans a revenue certificate is enough

for collateral guarantee) while banks offer the best product in terms of loan size, loan period, grace

period and most complete range of financial products.

As a brief conclusion, we can affirm that the passage from ex-GPR worker to microfinance

client doesn’t happen as a consequence of a conscious will of independence and self-realisation, but

derives from a need for financing a business activity often put up in extreme conditions, a need

which often cannot be satisfied by other institutions than a microfinance one, because of its specific

target focused on “poor” and its social aim.

111

CONCLUSIONS

The contribution of Microfinance to the Polish

development.

Investigating the way the microfinance model has adapted itself to the a-typical environment

of Poland, and, more in general, of transition countries, has proved a very enriching experience. It

has demonstrated how the principles of mutual trust among persons and of personal responsibility,

which are at the base of microcredit, are universal and hold good also in the peculiar context of

transition from a centrally-planned economy to a market-driven one and from the socialist regime to

a fully democratic state.

Microfinance, inserted in such a distinct situation, turned out to be a valuable and

appreciated means to counteract not only poverty in itself (in its manifold manifestations), but also

its most influencing cause: unemployment, which, in the author’s opinion, is currently the real

plague affecting Poland. MFIs operating in this country certainly still need to improve their

methods and above all need to develop alternative sources of financing their lending capital, but,

without any doubt, they are carrying out an enormous effort on two fronts: the financial one and the

cultural one.

On the first front, such a still recent industry (the examined MFIs have been operating, on

the average, for 6.8 years160) has delivered loans for a total value over 476 million US$161. This

already appreciable amount is calculated leaving out the value of credits conceded thanks to the

guarantees issued by Guarantee Funds. If we add this considerable new sum, we reach the huge

amount of 532.5 million US$162, that is, in short, over half a billion dollars. To get an idea, about

this same amount was delivered by the Polish government to Labour Funds in the year 1999 to

cover unemployment benefit expenditures and represented two-thirds of the sum spent by the state,

160 The average has been calculated on the 5 examined MFIs (FM, IM, FWW, FDPA, CPEF). The network of CUs has been left out because new CUs have been continuously established in recent years. 161 This figure has been calculated summing the total value of loans disbursed by CUs plus the total value of loans disbursed by all Loan Funds It’s not clear if the contribution of FDPA and of CPEF are included because data were available only in aggregate. The two MFIs together would however account for other 6.1 million US$. 162 The value of credit disbursed thanks to the Guarantee Funds amounted to 56.5 million US$.

112

for the same reason, in the year 2001163. It is impossible to estimate the number of new jobs

effectively created thanks to the million micro-loans granted by Polish MFIs, but undoubtedly the

results of such an unremitting work have much more actively and positively affected the Polish

economic and social environment, than the millions zloty disbursed by the state under the form of

unemployment benefits to passive and disillusioned jobless people in the same years.

And here we come to the second fundamental contribution of Polish MFIs to their country

and more concretely to the millions of unemployed people still hoping and willing to improve their

own lives and those of their families. MFIs, granting that small capital so necessary to start or

improve any business activity and so impossible to get from banks, have been not only sources of

longed financing, but have activated some fundamental qualities of human beings: imagination and

creativity in solving problems and getting out of difficult circumstances; freedom in taking

decisions and responsibility in carrying them out. If this is true also in other regions of the world

where microfinance is active, it is even more pertaining for Poland. Here in fact, a conspicuous part

of the population, especially adults and older people, having lived under the communist regime,

have been “infected” by a dangerous sense of helplessness and dismay, which has often prevented

them from taking any personal initiative and running any risk. Most of them still expect the state to

solve all their problems and to supply them with all the means of sustenance they need, at least to

carry on a mediocre life. Unluckily, such a passive and disillusioned attitude is not confined to older

people unable to conform to the rapid changes required by the transition process, but it has instilled

also in youth and rural areas inhabitants, who don’t see any positive prospects for their future and

prefer to rely on welfare assistance and to blame the state and the international situation for their

miserable conditions. Only concrete examples of successful entrepreneurs, who have put their own

reputation at stake and have been effectively supported by competent and passionate microfinance

loan officers both on the monetary and the psychological side, can perhaps stimulate those people

who can see no hope for a better future.

But microfinance also plays a third fundamental role, which lies in concretely realising the

principle of subsidiarity, so highly valued by the Catholic social doctrine and important base of the

nascente constitution of European Union. The attempt to find a solution to the severe problems of

unemployment and diffuse poverty starts, first of all, from the bottom level of society, the one

which is most involved in the problem and which is most likely to find the appropriate solution to it.

As a consequence, the state is not exonerated from its high responsibilities, but they only concern

those issues that the civil society alone is not able to manage by itself. The creation of new jobs off-

farm in rural areas, for instance, calls not only for the activation of individuals and of civil 163 These data are taken from IMF “Statistical appendix of the Republic of Poland”, table 23, p.25. Values were expressed in billion PLN. It has been estimated that 1 US$ was equal to 4 PLN.

113

organisations like MFIs, but also for a strong contribution of the state in the construction of those

indispensable infrastructures which can make a business not only start, but also prosper. Only if

provided with the adequate external conditions to expand, emerging businesses can further

contribute to the development of an attractive environment for other still hesitant potential

entrepreneurs.

A fourth contribution of microfinance to the Polish growth concerns again the relationship

with the state. As a matter of fact, through its effort to stimulate self-help and independence in order

to reduce unemployment and to improve living conditions, MFIs also support a culture of legality,

of regular employment, of systematic payment of taxation to the state, thus helping in the reduction

of dependency ratios and social expenses, as well as indirectly increasing state-budget revenues.

But microfinance is not a miraculous panacea for the problems of unemployment and

poverty in Poland and its effort and results need to be appreciated, but not overestimated.

Considerable obstacles to the foundation of a favourable environment for job-creation and poverty

reduction are still present and concern at least three different levels. At the macro-level, a steady

pattern of economic growth is required to generate that confidence which potential micro-

entrepreneurs need to undertake any initiative. Furthermore, a monetary policy enhancing

investment growth through an adequate price of credit and, at the same time, capable of maintaining

price stability is of fundamental importance, together with the development of a modern system of

technical and social infrastructures, the elaboration of simpler taxation schemes and an increased

flexibility in the labour-market.

The second order of problems concerns, on the contrary, MFIs themselves, which are often

hindered in their action and cannot entirely fulfil their mission. The most recurrent obstacles on

their way include: 1) a generalised lack of capital to be on-lent to clients; 2) regulatory provisions

not delineating any favourable legal form for their operations and often submitting MFIs to an

unfavourable tax regime and 3) criteria for the allocation of additional funds by public institutions,

like PARP (the Polish Agency for Enterprise Development), often too concentrated on formal

aspects rather than to the effectiveness and broad scale of operations of the applying institutions.

A third problematic level is still to be discussed and it is the one which most directly affects

individuals turning to microfinance for a financial help but who, once obtained the credit, still have

to face considerable impediments. If the registration of a new business is still quite a simple

procedure, not so easy is to cope with complicated accounting standards, tax and social contribution

payments, especially for those people who don’t have specific competence in those fields and who

get easily frightened in front of official documents. Moreover, lack of managerial skills and of

market-knowledge together with the ability to use all the instruments at their disposal, represent

114

another obstacle for potential entrepreneurs and reduce the positive impact of the funds delivered by

MFIs. Finally, high indirect labour costs cannot but hinder the growth even of the most promising

businesses.

A last consideration is worth doing, concerning the peculiar characteristics of all examined

MFIs. Each of them contributes in fact to the development of a more friendly economic and social

environment in its particular way, focusing on special aspects of the common problem of

unemployment. Credit Unions represent the best-performing model with over 600,000 members,

more than 800 branches and around 385 million US$ disbursed as loans, the most innovative and

the most stable one, thanks to its ability of self-financing through the deposits of members. Besides,

the active participation of members in CUs’ management and monitoring should be highly valued

as a successful example of co-operation between managers and volunteers. Finally, CUs show a

very deep outreach and demonstrate the concrete possibility of serving even the lower-income

layers of population with efficient performances and granting the complete safety of depositors’

savings.

Fundusz Mikro, the largest “classical” microfinance institution in Poland, with nearly

53,000 micro-loans granted so far, is characterised by a very deeply rooted mission, aiming at the

development of a solid entrepreneurial attitude in their clients and at the building up of a tight

relationship of trust and loyalty between borrowers and the institution. FM’s goal is not thus

primary poverty reduction, but rather entrepreneurship encouragement, and target clients are not

only micro- but also small and even medium entrepreneurs, in a vast majority living in urban,

better-off towns. The deep commitment of its managers and loan advisors to the implementation of

such a mission has brought FM to achieve important results: the setting up, during 8 years of

activity, of a nation-wide network of 30 outlets; the attainment of operational sustainability in the

financial year 1998-99; the issuing of loans for almost 100 million US$ and the development of

original and innovative products tailored on customers’ needs, such as Partnership Finance.

Not directly committed to poverty-reduction goals but all the same aimed at solving the

problem of lack of financing for small entrepreneurs is also the Canada Loan program by CPEF (the

Canadian-Polish Enterprise Fund), operating through selected regional Business Incubators. Though

active for only two years, the target of the programme is quite clear and identifiable from the high

average loan size: 30,000 PLN (six times that of FWW). CPEF’s micro-lending project seems

therefore to be directed to more mature entrepreneurs willing to improve their businesses but

lacking the adequate collateral to access to banking loans.

More straight involved in poverty alleviation and operating in more straitened economic

conditions are the three remaining MFIs: Inicjatywa Mikro, FWW (Polish Rural Foundation) and

115

FDPA (Foundation for the Development of Polish Agriculture). They all suffer from insufficient

capital to cover the high demand for credit which characterises the areas where they run their micro-

lending programmes. IM is active in the South of Poland, in critical regions where the economy,

formerly based on huge state-owned enterprises and mines, is undergoing a deep structural

transformation and where unemployment and the consequent poverty are highly diffuse. FWW and

FDPA don’t concentrate their activity on selected geographical regions, but rather on rural,

dispersed and more disadvantaged areas, only FWW being present on a national scale and more

directly referring to former state-farm workers. The size of loans granted are generally smaller and

risks taken in conceding the loans usually higher, but all of them have been however able to achieve

satisfactory results in repayment rates. Due to the lack of sufficient funds to increase the number of

credits extended and consequently to the relatively low revenues from interests on loans, none of

them has been able to achieve the operational sustainability, which is but further hindered by the

higher operational costs of running a programme in a more troublesome environment and among

more discouraged people.

Loan Funds, Guarantee Funds, Business Incubators, Information and Training Centres are

nowadays spread throughout Poland but unemployment rates are still galloping and poverty has not

yet been eradicated, reaching in rural areas dramatic peaks of 60-80% of the population.

Explanations are various and not at all univocal. What is certain, is the need for more funds and a

more efficient allocation of them; for professional, competent and open-minded officials; for a

modern educational system offering those flexible skills and knowledge currently required by the

rapid evolving labour-market; for advanced technical and social infrastructures and a welfare

system capable of protecting losers from the transition process without discouraging the taking of

personal initiative. A concerted effort by all levels of society is demanded to accomplish such an

ambitious but not utopian task: microfinance is only one of the actors on the stage.

116

APPENDIX 1

List of top 10 MFIs by number of borrowers.

Name of the MFI

Country MFI type Year of start of

operation

N. of borrowers

(as of 11/2001)

Loan portfolio (million

US$)

Depth Ratio (%)

1 FINCA Kyrgyzstan NGO 1995 20,315 3.3 60

2 MicroFinance Bank Georgia MFB 1999 15,724 23.0 199

3 Constanta Foundation Georgia NGO 1997 11,483 1.0 15

117

4 Sberbank Russia CB 1994 9,550 47.5 300

5 Fundusz Mikro Poland NGO 1995 9,405 9.8 40

6 Mercy Corps Women Kyrgyzstan NGO 1997 8,500 0.7 30

7 UMCOR/AREGAK Armenia NGO 1997 7,500 1.7 43

8 Kyrgyz Agricultural Finance Corp. Kyrgyzstan Public

Company 1997 7,462 1.5 77

9 KMB Bank Russia MFB 1998 7,424 78.0 633

10 MCO Partner Bosnia - Herzegovina NGO 1997 6,603 5.4 65

NGO = Non-Governmental-Organisation MFB = MicroFinance Bank CB = Commercial Bank Source: MFC: FORSTER S., PYTKOWSKA J. “The state of Microfinance in CEE and the NIS”

(draft version), p.29-30, 2002.

APPENDIX 2

List of top 11 MFIs by depth of outreach.

Name of the IMF Depth Ratio N. of borrowers

Total gross loan portfolio Age Method.

1 VOKA – Slovakia 0.09 62 20,340 Young GL

2 Horizonti – Macedonia 0.10 785 135,088 New GL / VB

3 Mikroplus – Croatia 0.10 1,156 542,852 Young GL

118

4 CARE Inti – Tajikistan 0.11 635 12,358 Young GL

5 FINCA – Azerbaijan 0.13 3,342 273,037 Young GL / VB

6 BWA – Uzbekistan 0.14 837 72,546 Young GL

7 Constanta - Georgia 0.14 11,483 987,256 Mature GL / IL

8 IRC – Azerbajian 0.15 1,140 128,000 Young GL

9 FINCA – Georgia 0.16 6,559 607,117 Young GL / IL

10 CRS – Bulgaria 0.21 1,396 444,150 Young VB

11 KCLF – Kazakhstan 0.21 3,150 788,595 Mature GL / IL

GL = Group Lending VB = Village Banking IL = Individual Lending Source: MFC: FORSTER S., PYTKOWSKA J. “The state of Microfinance in CEE and the NIS”

(draft version), p.34, 2002.

BIBLIOGRAPHY

! Books.

- BALCEROWICZ L. “Socialism, Capitalism, Transformation”, Central European University Press, Budapest, 1995.

- BESKID L. “The face of poverty in Poland”, in “Changes in Poles’ lives in market economy” edited by L.

Beskid, Warsaw, 1999. - BOERI T. “Structural change, welfare system and labour reallocation: lessons from the transition of

formerly planned economies”, Oxford University Press, New York, 2000.

- BOERI T., BURDA M. C. and KOLLO J. “Mediating the transition: labour markets in Central and Eastern Europe” Forum Report of the Economic Policy Initiative n. 4, edited by Ambrus-Lakatos and Schaffer, 1998.

119

- BRENTON P. and GROS D. “Trade reorientation and recovery in transition economies”, Oxford Review of Economic Policy, 1997.

- BUGAJSKI J. and POLLACK M. “East European fault lines: dissent, opposition and social activism”,

Westview Press, 1989. - CHILOSI A. “L’economia del periodo di transizione: dal socialismo di tipo sovietico all’economia di

mercato”, edited by A. Chilosi, Il Mulino, Bologna, 1992.

- CLAGUE C. “The journey to a market economy” in “The emergence of market economies in Eastern Europe”, edited by CLAGUE C. and RAUSSER G. C., Blackwell, 1992.

- CLEMENT C., MURREL P. “Assessing the value of law in transition economies”, edited by P.

MURREL, The University of Michigan Press, 2000

- DAHRENDORF R. “Essay on the Revolution in Europe”, Chatto, London, 1990.

- DOLEGOWSKI, MIELUS and SPYCHALSKI “Finanza per lo sviluppo: il caso Polonia” in “Finanza, imprese e sviluppo locale”, edited by VISCONTI M. and GRBAC D., Giuffrè, Milan, 2001.

- FISCHER S. “Privatisation in Eastern European Transformation” in “The emergence of market economies

in Eastern Europe”, edited by CLAGUE C. and RAUSSER G. C., Blackwell, 1992.

- GARTON ASH T. “History of the present”, Penguin Books, 2000.

- JOHNSON and KAUFMANN “Institutions and the underground economy” in “A decade of transition: achievements and challenges”, edited by HAVRYLYSYSHYN O. and NSOULI M. S., IMF,2001.

- Mc KINNON R. I. “Taxation, money and credit” in “The emergence of market economies in Eastern

Europe”, edited by CLAGUE C. and RAUSSER G. C., Blackwell, 1992.

- KRUEGER A. O. “Institutions for the new private sector” in “The emergence of market economies in Eastern Europe”, edited by CLAGUE C. and RAUSSER G. C., Blackwell, 1992.

- LINZ J., STEPAN A. “L’Europa post-comunista”, Il Mulino, Bologna, 2000.

- MILANOVIC B. “Income, inequality and poverty during the transition from planned to market

economies”, W.B. (Regional and Sectorial Studies), 1998.

- OLSON M. “The hidden path to a successful economy” in “The emergence of market economies in Eastern Europe”, edited by CLAGUE C. and RAUSSER G. C., Blackwell, 1992.

- RUPNIK J. “On the two models of exit from communism” in “Between past and future: the revolutions of

1989 and their aftermaths” edited by ANTOHI S. and TISMANEAU V., Central European University Press, 2000.

- ROBINSON M. S. “The Microfinance Revolution: sustainable finance for the poor”, Washington D.C.,

WB publications, 2001.

- ROTHSCHILD J. “Return to diversity”, Oxford University Press, New York, 1989.

- SOLTAN K. “1989 as a rebirth” in “Between past and future: the revolutions of 1989 and their aftermaths” edited by ANTOHI S. and TISMANEAU V., Central European University Press, 2000.

- STIGLITZ “The design of financial systems” in “The emergence of market economies in Eastern Europe”,

edited by CLAGUE C. and RAUSSER G. C., Blackwell, 1992.

120

- TARKOWSKA E. “Old and new shapes of rural poverty in Poland: the former state-farm worker’s

family”, p.44-57 in “Past and present poverty “ edited by KUSA Z., Bratislava, 1997.

- TARKOWSKA E. “An underclass without ethnicity: the poverty of Polish women and agricultural labourers” in “Poverty, ethnicity and gender in Eastern Europe during the market-transition” edited by R. J. EMIGH and I. SZELENYI, 2001.

- VISCONTI M. “L’impatto dei processi di privatizzazione sulla realtà finanziaria aziendale” in “Finanza,

imprese e sviluppo locale: casi di paesi europei in transizione”, edited by VISCONTI M. and GRBAC D., Giuffrè Editore, 2001.

- WILKIN J. “The transformation of state-farms in Poland in view of local authorities and inhabitants of

state farms settlements” in “The people and the land after the collapse of the former state-farms. Sociological and Economic Analysis.” Edited by KORAB K., Warsaw, 1997.

! Papers and official documents.

- CHESTON S., REED L. et al. “Measuring transformation: assessig and improving the impact of microcredit”, paper prepared for the Microcredit Summit Meeting of Councils in Abidjan (Cote d’Avoire), June 1999.

- CHRISTEN R.P., ROSENBERG R. “Regulating microfinance: the options”, Journal of Small Business

and Enterprise Development, University of Manchester, U.K., Spring 2001. - CHRISTEN R.P,et al. “Maximising the outreach of microenterprise finance: the emerging lessons of

successful programs.”, IMCC, Arlington, 1994. - FAUNDEZ J. “Legal reforms in developing and transition countries – making haste slowly”, from “Law,

Social Justice and Global Development Journal”, 2000. - FLEMMING J. and MICKLEWRIGHT J. “Income, distribution, economic system and transition.”

Innocenti Occasional Paper, Economic and Social Policy Series n. 70, May 1999.

- FUNK T. and LYMAN T.R. “The legal and regulatory environment for microfinance in CEE and the NIS”, Esq. Day, Berry and Howard Foundation, presented at the Conference: “NIS Policy Forum on MF law and legislation”, Krakòw, June 2001.

- JOHNSON S, KAUFMANN D, Mc MILLAN J, WOODRUFF C. “Why do firms hide? Bribes and

unofficial activities after communism”, Journal of Public Economics n.76, 2000.

- KOLARSKA-BOBINSKA L., ROSNER, WILKIN J. “The future of rural areas in Poland”, paper presented as a background paper in a meeting of the Working Group “The future role of agriculture in Europe: food production versus environmental responsibility”, ARL, Hanover, 2002.

- KOLODKO G. W. “Income policy, equity issues and poverty reduction in transition economies”, Villa

Borsig Workshop Series, 1999.

- MIROSLAW M. “Polish experience in building up SME’s support”, paper presented at the Round Table on "The Polish Experience of Transition: Accomplishment and Problems" held on 7 June 1999 at the Palais des Nations in Geneva.

- PINTO, BELKA, KRAJEWSKI “Transforming state enterprises in Poland: evidences on adjustment by

manufacturing firms”, Brookings Papers on Economic Activity, No.1,

121

- SZWAJKOWSKI W. “Secrets of microfinancing” (draft version), 2002.

- WILKIN J. “Rural Poland in the process of systemic transformation. Attitudes of rural population towards the market, state and European integration”, paper presented at the international conference “European Rural Policy at the Crossroads”, Aberdeen, July 2000.

- ZIENKOWSKI L.: “Contribution of small and medium enterprises to the development of Polish

economy”, Research Centre for Economic and Statistical Studies, Central Statistical Office and Polish Academy of Sciences, Warsaw, 1998.

- CASE (Center for Social and Economic Research) “Demand for Microloans in Poland, Synthesis of

Research Results”, Warsaw, September 2001.

- DEMOSKOP BiznesBus survey “Opinions of managers on the forms of support, business self-government, sources of information on forms of assistance, environmental protection, press information”, Warsaw, November 2000.

- EBRD “Transition Report”, various years (1994, 1996).

- EUROSTAT “Employment and labour market in Central European countries”, 2001.

- FAPA (Foundation of Assistance Programmes for Agriculture), “Stereotypes in the European Union

concerning Polish agriculture”, Warsaw, November 2000.

- FM (Fundusz Mikro) “Annual Report 1999”, Warsaw, 1999.

- FM “Report on Activities as of 31st December 1998”, Warsaw, 1999.

- GUS (Central Statistical Office of Poland) “Poverty Indicators”, Warsaw, 1997.

- GUS “Statistics on businesses employing less than 9 workers 2001” (Polish language), Warsaw, 2002.

- GUS “Statistical Yearbook of the Republic of Poland 2002”, Warsaw, 2002.

- GUS “Yearbook of Labour Statistics 2001”, Warsaw, 2002.

- FDPA (Foundation for the Development of Polish Agriculture) “Rural Poland 2002”, Warsaw, 2002.

- KSFP (National Association of Guarantee Funds) “Report na temat dzialalnosci funduszy poreczen kredytowych w Polisce w okresie od 1994 r. do listopada 2001 r.” (Report on the issue of the activities of Guarantee Funds in Poland in the period 1994 – November 2001) (Polish language only), December 2001.

- IMF: HOLDEN P., PROKOPENKO V. “Financial development and poverty alleviation : issues

and policy implications for developing and transition countries”, October 2001.

- IMF: KEANE P., PRASAD E. S. “Changes in the structure of earnings during the Polish transition”, Working Paper WP/02/135, August 2002.

- IMF “Concluding statement of the IMF mission to Poland”, September 2002.

- IMF “Republic of Poland: Statistical Appendix”, May 2002.

- ISP (Institution of Public Affairs) “Peasant, villager, farmer. The Poland accession to the European Union:

the hopes and fears of the Polish rural population”, ISP, Warsaw, 2000.

- MFC: FORSTER S. and PYTKOWSKA J., MFC report: “The state of microfinance in C&EE and the NIS” (draft version), Warsaw, 2002.

122

- MFC: PAWLAK K., MATUL M. “Poverty, Microenterprise and Microfinance in the Eyes of the Rural Poor in the Region of Northwest Poland” (draft-version), Warsaw, 2002.

- MFC report “AIMS and MFC Impact Assessment Project”, Warsaw, 2000. - MFC “Initial findings of Microfinance Regional Mapping to Finance study”, May 2002.

- MFC “Regional Mapping and Access to Financing Study for CEE and the NIS”, Concept Paper, Warsaw,

August 2001.

- MFC “The Results of Internal Market Research”, available on MFC web-site.

- Ministry of Agricolture and Rural Development of Poland “Note on Polish agriculture”, available on the web-site.

- Ministry of Agriculture and Rural Development of Poland “Coherent structural policy for rural areas and

agricultural development”, document adopted by the Ministers Council, 21st April 1998.

- NBP (National Bank of Poland) “The Polish banking system in the nineties”, Warsaw, December 2001.

- NBP brochure “National Bank of Poland”, Warsaw, 2002.

- NBP “Summary evaluation of the financial situation of Polish banks”, Warsaw, October 2002.

- NBP “Average weighted interest rates in the Polish banking system”, Warsaw, 2003.

- OECD “Employment Outlook”, 1996. - OECD “Microcredit in transitional economies”, document GD(96)40, LEED program, Paris, 1996.

- PARP (Polish Foundation for Enterprise Development) “Report on the condition of the small and medium-size enterprise sector in Poland for the years 1999-2000”, Warsaw, 2001.

- PFSPD (Polish Foundation for SME Promotion and Development), “Business environment for running SMEs in Poland and the EU countries”, Warsaw, 1998.

- UN “Privatisation and regulation in developing countries and economies in transition”, UN Department of Economic and Social Affairs, New York ,1999

- UNDP: GORNIAK J. “Poverty in transition: Lessons from Eastern Europe and Central Asia”, in UNDP

report “Choices for the poor: lessons from national poverty strategies”, March 2001.

- UNDP: KABAJ M. “Program outline for actively counteracting poverty and social marginalization”, Warsaw, September 1999.

- UNECE: MIROSLAW “Polish experience in building up SME support” Operational Activities, 1999.

- UNECE: SZABO’ “Characteristics of SMEs in the countries in transition”, based on the document

IND/AC.3/1as of 14th February 1996.

- UNECE: SZABO’ “Development of the SME sector in the Visegràd countries”, Operational Activities, 1996.

- UNECE: SZABO’ “Microcrediting small and medium-sized enterprises in countries in transition”,

prepared for the Microcredit Summit held on February 1997, Washington D.C.

123

- WB: van GREUNING H., GALLARDO J., RANDHAWA B. “A framework for regulating microfinance institutions”, Financial Sector Development Department, December 1998.

- WB: HELLMAN, JOEL and KAUFMANN “Seize the State, seize the day: state capture, corruption and influence in transition”, Policy Research Working Paper n. 2444, 2000.

- WB: MILANOVIC B. “Explaining the increase in inequality during the transition”, 1999.

- WB “Annual Report 2001”, Washington D.C.

- WB “Making transition work for everyone: poverty and inequality in Europe and Central Asia”, 2000.

- WB “Poland’s labour market”, 2001.

- WB “Rural environment and social development strategies for the ECA region”, Prague, 2000.

- WB “Transition: the first ten years”, 2002.

- WB “World Development Report”, 2001.

- WOCCU: EVANS A. C., RICHARDSON D. C. “Polish Credit Unions Development: building a sustainable network of financial services to serve low-income masses”, Research Monograph Series n.17, August 1999.

- ZUS (Social Insurance Institution of Poland), “Social Insurance in Poland: information, facts”, Warsaw, 2002.

! Other sources on paper.

- “FINANCE and DEVELOPMENT”, (IMF magazine): BALCEROWICZ L. “Poland’s transformation” vol. 37, n. 3, September 2000.

- “FINANCE and DEVELOPMENT”: KEANE P. and PRASAD E.S. “Poland: inequality, transfers and

growth in transition”, vol. 38, n. 1, March 2001.

- “FINANCE and DEVELOPMENT”: KNIGHT M. “Developing and transition countries confront financial globalisation”, vol. 36 n.2, June 1999.

- FM (Fundusz Mikro) promotional leaflet: “Introduction to Fundusz Mikro” - FM Bulletin, January 2001.

- FWW (Foundation for Rural Development) promotional leaflet: “FWW: our programs in 2002”.

- FWW promotional leaflet: “FWW: Program Mikropoziczek” (Polish language), March 2001.

- “IL SOLE 24 ORE”: interview to Willem Buiter, Chief Economist of EBRD, 12th December 2002.

- “IL SOLE 24 ORE”: interview to Leszek Balcerowicz, Governor of the National Bank of Poland, 2nd

March 2003. - “MFC BULLETIN”, Spring 2001, Fall 2001, Spring 2002. - “MFC POLICY MONITOR”, n. 1, July 2002.

124

- “MBB” (Micro-Banking Bulletin): RHYNE E. “the Yin and Yang of Microfinance: reaching the poor and

sustainability”, n. 2, July 1998.

- “MBB”, n. 4, February 2000.

- “MBB” n. 8, November 2002.

- PARP “The use of available loan programs for micro and small entrepreneurs”, acts of the homonymous Conference held in Warsaw, 27th-28th August 2002.

- “RZECZPOSPOLITA”, 14th November 2002.

- “RZECZPOSPOLITA”, 5th December 2002.

- “THE WARSAW VOICE”: STYCZEK D. “Big words, small actions”, 18th May 1997. - “THE WARSAW VOICE”, 27th October 2002.

! Personal Interviews164.

- FDPA: Mr. SABARANSKA Katarzyna, Field Office Coordinator. - FUNDUSZ MIKRO: Mr. SZWAJKOWSKI Witold, Chair of Management Board.

Mrs. CZARNOMSKA Agnieszka, Marketing and Public Relation Director.

- FWW: Mr. KOPANSKI Sebastian, Loan Advisors’ Inspector.

- INICJATYWA MIKRO: Mrs. NOREK Izabela, Chair of Management Board. - MFC: Mr. FIJALKOWSKI Marcin, Legal and Regulatory Program Coordinator.

Mr. GUZOWSKI John, Training and Consulting Director. Mrs. PYTKOWSKA Justyna, Data Analist. - PARP: Mr. KILIANSKI, Director of Financial Instrument Unit. - SKOK: Mr. KIJANKA Dariusz, Quality System Management Representative.

! Web-sites.

- www.catholicrelief.org (Catholic Relief Association) - www.cgap.org. (Consultative Group to Assist the Poor) - www.constanta.ge. (Constanta Foundation, Georgia)

- www.cpef.com.pl (Canadian-Polish Enterprise Fund)

164 All interviews were held in November – December 2002 in Warsaw. The interview with Mr. Kijanka from SKOK was held in Sopot.

125

- www.ebrd.org. (European Bank for Reconstruction and Development) - www.eurostat.org. (Eurostat)

- www.europa.eu.it. (European Union)

- www.fdpa.org.pl (FDPA, Foundation for the Development of Polish Agriculture)

- www.fincageorgia.org.ge (FINCA Foundation, Georgia)

- www.forafund.ru (FORA Foundation)

- www.funduszmikro.com.pl (Fundusz Mikro)

- www.fww.org.pl (FWW, Foundation for Rural Development)

- www.gdrc.org. (Global Development Research Center)

- www.gdrc.org/icm (Virtual Library on Microcredit)

- www.kmb.ru. (KMB Bank, Russia)

- www.imf.org. (International Monetary Found)

- www.inicjatywamikro.pl (Inicjatywa Mikro)

- www.mbg.com.ge (Microfinance Bank of Georgia)

- www.mfc.org.pl. (MicroFinance Centre, Poland)

- www.mg.gov.pl. (Ministry of Economy of Poland)

- www.microbanking-mbb.org (Micro-Banking Bulletin)

- www.microfinance.com (microfinance web-site)

- www.microfinancegateway.org (CGAP resource for microfinance)

- www.microjournal.com (Electronic Journal on microfinance)

- www.mixmarket.org (Global Information Exchange for the Microfinance Industry)

- www.oecd.org. (Organisation for Economic Cooperation and Development)

- www.opportunity.org (Opportunity International)

- www.parp.gov.pl (Polish Agency for Enterprise Development)

- www.planetfinance.org (Microfinance Platform)

- www.polandembassy.org (Embassy of Poland, USA)

- www.prismamicrofinance.com (PRISMA Foundation)

- www.rferl.org. (Radio Free Europe)

- www.undp.org (United Nation Development Programme)

126

- www.unece.org (United Nation Economic Commission for Europe)

- www.usaid.org (United States Agency for International Development)

- www.villagebanking.org (FINCA Foundation)

- www.warsawvoice.pl (The Warsaw Voice)

- www.woccu.org (World Council of Credit Unions)

- www.worldbank.org. (World Bank)