Cash Management Systems: A Search for Viable Options A Case Study on Kashf

By Saadia Malik

Table of Contents

INTRODUCTION .................................................................................................................................................3 OPERATIONS.......................................................................................................................................................4 CASH-MANAGEMENT.......................................................................................................................................5 PHASE 1 ...............................................................................................................................................................5 PHASE 2 ...............................................................................................................................................................5 PHASE 3 ...............................................................................................................................................................6 LONGER TERM .....................................................................................................................................................6 Box 1.1 Future Cash Management Options ...................................................................................................7 COST SCENARIO ................................................................................................................................................8 CONCLUSION ......................................................................................................................................................9 Box 2.1: CMS Options Pros and Cons ........................................................................................................9 IN-CLASS DISCUSSIONS.................................................................................................................................11

Introduction
Kashf was established in 1996 by a very inspired Roshaneh Zafar. Her encounter with Muhammad Yunus led to two months of research in Bangladesh, and culminated in the development of a pioneer microfinance institution in Pakistan. Kashf currently functions as an NGO, with its head-office in Lahore. Its services are available to urban, poor female entrepreneurs whether they seek to establish new businesses or invest further into existing ones. Its product line includes general loans (for fresh entrepreneurs), emergency loans (immediate needs for financing childrens education, payment of utility bills or other unforeseen expenditures), business sarmaya loan (heavier loans for businesses with a minimum running experience of 2 years), insurance (so that families of clients are protected in the unfortunate event of death) and home loans (bettering standards of living). As Kashfs existing clients enter more loan cycles, year after year, qualifying them for bigger loans, and as the organization reaches more households, the cash flow in its operations is on a steep rise. Handling these tides warrants more and more attention.

Operations
Kashfs operations are spread across four areas, three of which come in the vicinity of the Punjab and one in Sindh. Each of these areas consists of 7 or 8 branches, which serve the women of poor families living within a 5 kilometer radius. These branches are run by a branch manager, 5 loan officers and an accountant/teller. The loan officers form the backbone of the organization, for they are the ones who reach out to the urban poor, spread the word around their neighbourhoods, attract new clients, motivate, monitor and educate existing ones. They handle 27 centres. Every centre caters to 15 to 25 women, who are further divided into groups of 5 including a group leader, for organizational purposes. The centre does not physically exist as Kashf paraphernalia. Rather, it is the name given to the designated house of a client declared the centre manager. Every fortnight, the group leaders collect installments from her group members, which are in turn, collected by the centre manager. These installments are supposed to be deposited in one chunk to a designated bank branch nearby, a day before the 15 to 25 women belonging to her centre, get together at her place, and are visited by the loan officer. Suraiya Baji and Naseem Baji are two centre managers falling within the domain of Kashfs Township branch in Lahore. They are both required to make their centre members deposits in the same bank branch every fortnight. Both bajis are happy with their experiences and separately shared with our survey team that it took them ten minutes maximum to have their deposits made. No ill-experiences at the bank. No time wasted. No complaints. However, Kashf currently has a network of 153 branches nationwide, and these are the experiences of the clients of 1 branch only. Other centre managers have not been so fortunate. In due course of time, Suraiya Baji and Naseem Baji will be re-routed towards the Kashf branches for depositing their installments. This case-study serves to address the following questions. Why did Kashf feel the need to develop an internal cash management system? Is it ideal for an NGO to handle cash all by itself, despite the security risks? Is an alliance with the banking system a better alternative? What are the administrative costs and financial costs of either arrangement? For the purposes of this study, branch' will refer to one or more branches of Kashf foundation; while bank branches will explicitly be referred to as bank.

Cash-Management
Cash is involved in two operations, in any MFI: For disbursement and for recovery. With microfinance only beginning to take roots in Pakistan, and Kashf being one of the pioneers in the field, it has had to face many challenges. Several phases of development have led it to where it is right now.

Phase 1
Loans were disbursed through banks and recovered by the loan officers themselves, from the centres. This meant that they had to carry cash in their pockets upon collection, every week. One fortunate incident changed it all, shaking the management at its core. Shazia Alam, a loan officer in Kot Lakhpat, was shot dead by miscreants in pursuit of cash, on May 23, 2001. Kashf shifted its recovery operations to banks too, because the risk of murder was not a compromise that the organization was willing to take. The Muslim Commercial Bank (MCB) was now responsible for both disbursements and recovery; this love affair was, however, short-lived. The bank was unhappy on two accounts. There were too many small transactions instead of a few big ones; The clients were all poor women, who the bank thought created nuisance within their premises (finger marks on the walls, confusion, time-consumption etc.). With the banks complaints and dissatisfaction on the rise, and with the bank bouncing cheques, Kashf conducted a focus group survey of its clients. They were all complaining of torture and ill-treatment at the bank, asked to wait for long periods of time for encashments of cheques, leaving them highly unsatisfied and ridiculed. It was 2003, and Kashf was still wary of the incident of 2001 so it kept on struggling for its collaboration with the bank. It sought to introduce cash management incentives. MCB continued its allergic reactions to Kashf, humiliating people at the top of the organization, and leaving nobody guessing that it wanted to part ways with microfinance clients. Patiently, the management at Kashf tried to educate and motivate the powers-that-be about the work it was doing, the impact it was creating, and the future it promised. It also offered to pay the bank, its transaction costs.

Phase 2
In March 2004, Kashf received its first acknowledgement and note of welcome from MCB. Immediately, 25 of its branches were piloted into the new model. Both disbursement and recovery were designed to be taken on by the bank. Specially designed and carbonated deposit slips were incorporated for recovery. By mid-2005, as Kashf was preparing to introduce its 70-odd branches to the new model, the bank refused to cater to further branches of the NGO. It had then taken up a non-cooperative mode. This shocked Kashf since, according to plan, this was the time to move ahead than to roll back.

Another possible incentive to be given to banks was to keep deposits with each worth Rs. 1,000,000. This meant that for all Kashf branches combined, Kashf would have to invest idle cash worth approximately Rs. 70,000,000 (1,000,000 x 70). The opportunity cost for such funds was found to be both unmanageable and irrecoverable for the NGO. Left with no choice, it now had to take on the load of all cash-related transactions. This, it decided, to do in stages.

Phase 3
The pilot run for internalizing cash management was conducted at Kashfs Sirajpura branch, which was now well into its 5th loan cycle. This means that the branch had many clients who had consistently taken annual loans for a minimum of five years. Such a record qualifies them to acquire general loans worth Rs. 50,000 (while newcomers are offered around Rs. 8,000 against a year). One centre, which consists of roughly 25 women, thus translated into a transaction amounting to about Rs. 1,250,000 (50000 x 25). Disbursements and recovery were now handed over to the chief officer (who now functioned both as the CEO and the teller of his branch). His performance was mapped against time, in lieu of general loans, emergency loans and handling savings of clients. The teller activities took up 9 hours of his time on a daily basis, and this was reported to the upper-tier of the organization on a weekly, monthly and quarterly basis. It was a major cause for concern. Another major cause for concern was mitigating risk. A lot of cash was now traveling from the bank to the branch. Insurance was one solution. But it was accepted that the risks associated with cash-handling at the branches, was an unavoidable trade-off. It was soon recognized that the chief officer of the branch was being over-burdened, and he screamed for relief from cash-handling responsibilities. A teller was hired at this point. There was now another challenge: to recover the cost of the teller. Every client transaction at the bank cost approximately Rs. 35. It was decided that the teller would accumulate all functions of disbursement and recovery at the branch itself, and would make one big, accumulated transaction with the bank at the day-end. These savings were in turn utilized to pay the tellers salary. In the first quarter of 2009, Kashf is now well into the third phase of transition. 54 of its branches are now handling disbursement, and 6 are handling recovery too.

Longer Term
For the very longer-term, Kashf needs to analyze whether there should be an attempt to outsource cash management. The reason for this concern is all too obvious. With planned growth, the volume of cash involved in its operations will keep rising and eventually reach internally unmanageable proportions. Box 1.1 delineates future options for the organization.

Box 1.1 Future Cash Management Options Bank/ Services offered Agency MCB MCB has agreed to retain the recoveries in all existing and new branches at a substantially higher cost of Rs. 60 per transaction HBL HBL has agreed to pick our disbursements Has quoted Rs. 20 per transaction provided we disburse only two days a week. To do disbursements and resultant fund transfers, HBL has quoted for Rs. 45 per transaction

UBL

UBL offered to set up their booths in our branches. They proposed to pick up cash management. An initial discussion indicates that they shall have some other activities like receipts of utility bills etc also in those booths. ABL has agreed in principle to manage our disbursement through their network of 750 real-time online branches. Full cash management with the same system on which we are working with MCB. They are already working with Citibank as correspondent agency for their cash management clients. Kush-hali Bank has also contacted them recently. Certain questions like what will be the impact of KB going into partnership with them for Kashf? Citibank has shown inclination to handle CMS through PP

Position in market/ benefits to Kashf Very professional management team Tested and implemented system Good relationship Good reputation Going through change as management has changed In process of implementing new software Kashf will not be as responsive to its clients since disbursement will be fixed to 2 days a week. Impact on efficiency and competitiveness of services. Practically this will also increase the traffic for the bank and may not be sustainable. UBL is fast growing bank and falls n the top 5 banks operationally and otherwise. After having gone through frequent management changes, it is now stabilized and growing. The questions to be answered are the risks threats in having UBL set up booths in Kashf branches. ABL is one of the last banks to be privatized and is now growing at a quick pace. PP has a network of 5000 direct and another 8000-9000 indirect post offices across the country. The target market and the traffic they have at their post offices almost overlap with Kashfs clientele. Further questions and areas of concern can be their focus on quality and customer services like? Their image and reputation and how does it link with Kashfs image? They have vast experience in CMS being the pioneers in the country. The advantages?

ABL

Pakistan Post

Citibank

Internalization What would be offered?

Cost Scenario
CGAP recognizes the following administrative costs associated with MFIs core processes1: Opening deposit accounts, which includes activities like group formation, helping clients fill out paperwork to open accounts, recording client information and documentation, issuing passbook and checkbooks; Servicing deposit accounts, which includes customer-facing and back-office activities for existing account holders (e.g. taking deposits from clients in the field through roving collectors, replacing or issuing new passbooks, helping clients fill out deposit slips, clearing cheques, closing accounts) Handling cash transactions, which refers to funds manipulation (e.g. recording cash in, deposits; and cash out, withdrawals), and back-office activities involving cash administration (e.g. supplying cash to branches, counting cash at the end of the day); Sustaining activities, which refers to all activities not directed exclusively to a particular service or product, but necessary for the operation of the institution (e.g. audit, risk management, internal control, etc.).

Should Kashf opt to outsource its cash management to commercial banks in the longer-run, its expected costs will be Rs. 55 to Rs. 70 per transaction, aside from the initial costs of opening deposit accounts and running costs of servicing them. The total cost incurred will amount to Rs. 221 million to Rs. 263 million in the next four years. This, it assesses, will take away from the organizations self-sufficiency (OSS) by about 10 to 12 per cent. Arrangements with the Pakistan Post office will cost roughly the same in the next four years, and OSS will also expectedly drop in the same manner. Hence, cost cannot be the deciding factor in opting for either option. A deeper analysis of factors such as outlook, future prospects, and pros and cons above financial costs, will make the picture clearer for Kashfs management. Should the organization merge its current transition towards internalization, to the longer-run, its transaction costs will be significantly less than either commercial banks or the post office: approximately Rs. 17 per transaction. It will have to bear less than half the cost - Rs. 100 million - in the same period, and will obviously be beneficial for its OSS. However, challenges of fraud and security will run ripe and deep will drive its management into sleepless nights. It will be useful to assess the impact and challenges of Grameen Banks roving collectors, carrying cash to-and-fro, on public transport, day-in and day-out.

Deshpande, Rani and Jasmina Glisovic-Mezieres. "The True Cost of Deposit Mobilization." CGAP Dec 2007.