Revolving Fund

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Women in Kassala and Gedarif, who were organized in community-based organisations (CBOs) were able to improve their families' livelihoods from income generated as a result of technical training and the establishment of a community managed revolving fund. Photo: Practical Action
Beneficiary of Ghana WASH
Alliance Sanitation Revolving Fund

Revolving Fund is capital raised with a certain purpose which can be made available to the same users more than once. ‘Revolving’ represents that the fund’s resources circulate between the Fund and the Users, meaning that each group member has the ability to borrow in turn, provided the others have repaid. Revolving funds are established with an intention that they should be self-sufficient and sustainable. The initial supply of lending capital usually comes from the public sector (IFIs, development banks, national governments, etc) and the funds might be used to extend small loans to households or entrepreneurs. The repayment of the loan, together with interest, is used to replenish the fund and make further loans.

Establishing Revolving Fund

Revolving funds are established in order to achieve a particular purpose or assist a particular target group. This could be possible if its continuity is guaranteed. Conflicts may occur if the purpose cannot be achieved or the target groups may be assisted in some other way. It is important to consider whether it could be attained effectively by means of an independent Revolving Fund or through a Revolving Fund associated with the existing institutions. One has to analyze the reasons in terms of risk factors, securities, profitability, institutional policies, past experiences, availability of funds, etc. and adopt appropriate solutions.

The following are some of the suggestive illustrations:

Difficulties may lie in the institutional structure, decision making systems and the statutory provisions. Eliminating such obstacles ought to form part of the project activities. It is necessary to analyze the causes of the past failures and if not available, it would be worthwhile to establish an experimental Revolving Fund in cooperation with the existing institution. Providing the right funding as a part of the project activity would solve the institution’s funding problems. Consideration may be given for improving the access of the target group to the existing institutional facilities for strengthening the cooperation between the target group and the institution.

Financing of Revolving Fund

A fund may be financed by its users or by users of projects or it may be financed by third parties or by both. In most cases, the fund will take time to become fully established if it depends on small injections of funds in the form of contributions, savings deposits or phased donor financing. Contributions may be voluntary or compulsory. Obtaining contributions from outside the fund’s target group is termed as ‘external financing’ such as donor funds.

In development cooperation, many Revolving Funds initially draw on donor funds, which is true of credit funds and of guarantee funds. In majority of cases, the involvement of the users in enabling the fund to be financed by them is minimal or non-existent. Although there are no technical objections to hundred percent financing, experiences show that the financial involvement of the target group is a major precondition for successfully achieving the aim of the fund. When setting up a Revolving Fund, the aim should be to ensure that the target groups are financially involved, either voluntarily or compulsorily. Participation in Revolving Fund by a donor may be in the form of grants, interest-free advances, loans, combinations of any of these and guarantees. However, dependence on donor funding should be temporary and be gradually phased out. As regards, advances and loans to the Revolving Fund, the multi-year financial prognoses relating to the fund should indicate when repayment will be possible and the schedule for phasing out guarantees.

Legal status

It is important to know who is legally authorized to represent the fund and who owns or manages it. This determines the manner in which the fund can act vis-à-vis the financiers and the users, actions to be taken for transfer of funds and the influence the financier/donor can bring to bear or the requirements can be imposed on the fund.

It is necessary for the fund to acquire legal status for a clear relationship between the fund, its financiers and the users, which can be possible by giving the fund itself a legal status or by attaching the fund to an existing body with legal personality which will administer the fund under the terms of agreement. The type of legal personality which is felt to be appropriate for a fund, will depend on the aim of the project. When a fund acquires legal status, it shall be registered as a fund with appropriate public authority. Besides the requirement of legal status, it will also be necessary to comply with the statutory requirements.

Building up of Revolving Fund for Self-sufficiency

There are two possible ways of using Revolving Fund, namely, ‘making the fund’s capital available to the users’ and the other, ‘making income from the fund available to the users’. In the former case, the availability of fund’s capital to users depends on lending periodicity and prompt repayments. In the case of later, the fund’s capital is not directly available to the users and only yield from the investment of the capital is made available. The capital is not depleted and the interest received by the fund is lent to users and even part of these loans are subsequently repaid to the fund. Thus, the fund’s capital grows. If the accumulated interest assumes the role of the original capital, the original capital can be repaid to the donors, provided the establishment of Revolving fund is by means of donor financing. The fund itself can provide guarantees to enable local fund to be borrowed. The amount of capital which the fund possess determines the maximum guarantee it can provide.

Management and Administration of Revolving Fund

Revolving Fund has financial relationships with the financiers and the users of the fund which entail obligations to make payments or repayments and to submit reports. If the fund has independent legal status, there will be a statutory obligation to submit regular financial reports. This makes it necessary to keep separate financial records on the Revolving Fund at all times. In many countries, the financial reporting obligation and the form in which the reports have to be submitted are laid down by Law.

The financial report shall include profit and loss account, cash flow statement indicating overview of sources and applications of funds and a balance sheet approved by the fund’s trustees and by an external auditor and shall be finalized annually within three months of the end of the financial year. It is advisable to produce profit and loss account quarterly for use in monitoring and planning a Revolving Fund Project together with a cash flow forecast for the rest of the year. Depending on the type of the project, a quarterly balance sheet may also be useful. The fund’s multi-year planning must consist of a minimum of five year cash flow forecast, which should be adjusted and extended annually on the basis of the results achieved. The staffing of the Revolving Fund Project should be such to enable maintenance of adequate records including records on premiums, contributions, loans and advances. The information on the personal particulars and all financial aspects relating to the users should be kept confidential by storing and securing the relevant information and records appropriately. Third parties should not have access to them.

A fund may be terminated by premature termination, termination without transfer, termination combined with transfer or by change of fund’s terms of reference with or without transfer. The termination may be due to the exhaustion of funds, external factors which impede activities or misuse.

Sustainability of Revolving Fund

The Revolving Fund is expected to become self-sufficient after an initial period. Its capital is expected to remain at a constant level more or less without any fresh external financing. The factors that affect the operation of a Revolving Fund are the interest rates (for lending and/or borrowing), levels of premiums; administrative expenses; payments/repayments and failure to make them; inflation and the liabilities. In order to keep the Revolving Fund self-sufficient and sustainable, appropriate measures would be required to be adopted to effectively appraise and monitor these factors for its improved operations.

The appraising of proposals for Revolving funds should include the reasons for setting up Revolving Fund, it purpose, administrative and management practices, financial mechanisms including auditing systems, forecasting, monitoring and evaluation procedures, etc. The operations of Revolving Funds should be monitored and evaluated periodically against its objectives in terms of the characteristics of users, volume of transactions, advances, loans and claims, promptness of payments/repayments, write-offs, rate of circulation, procedures for processing and rapidity of collections, organizational and financial administration and the effects on users and other stakeholders. The practice prompt recovery of the costs is expected to generate a sense of ownership and ensure the financial viability and sustainability of the schemes. These measures would help strengthen the stakeholders with the necessary framework for effective formulation and implementation and thereby achieving sustainability.

To continue reading the full instructional guide: Guidelines on Revolving Funds for Community Managed Water Supply Schemes and Construction of Household Toilets in Urban Slums in Madhya Pradesh, India complete with case studies from India and many samples of official revolving fund forms, receipts, and other documents.

Field experiences

Project 268
Akvo RSR Project: Revolving fund water and sanitation SHIPO

The project encourages business development in hand-drilling activities, production of rope pumps and delivery of safe water household filters by blending a sound mix of grants and new forms of microcredits in a revolving fund setting. Through partnership with local banks (SACCOS) and Village groups both consumer and producers/contractors are enabled access to funding to obtain water&sanitation services. Project manager is the local NGO SHIPO who trains the craftsmen and does the marketing.

Project 456
Akvo RSR Project: Partnership in WASH services delivery - Beneficiary of the Sanitation Revolving Fund

Afa Shahadu from Aduyili in Northern Ghana is one of the beneficiaries of the Sanitation Revolving Fund of the Ghana WASH Alliance Programme. Just like other beneficiaries, he received funds for only one household latrine, but constructed two - 1 for male & the other for female. The additional 1 he constructed was with his own money. Afa Shahadu lives in a thatch roofed room but roofed his latrines with iron sheet. This shows the importance he attaches to owning a household latrine after taking part in CLTS process in his community.

The Sanitation Revolving Fund (SRF) in Vietnam: a successful pilot and scaling up

In 2001, a SRF component was incorporated in the World Bank-financed, Three Cities Sanitation Project in Vietnam to provide loans to low-income households to build on-site sanitation facilities. The SRF provided small loans (USD 145) at partially subsidised rates to low-income and poor households to build a septic tank, a urine diverting/composting latrine or a sewer connection. To access the loans, households needed to join a Savings and Credit group, which brought together from 12 to 20 people who must live close to each other to ensure community control. The loans covered approximately 65% of the cost and enabled the household to spread the costs over two years. The loans acted as a catalyst for household investment although households needed to find other sources of finance to cover total investment costs, such as borrowing from friends and family.

The initial working capital for the revolving funds (USD 3 million) was provided as a grant by the World Bank, Denmark and Finland. The SRF was managed by the Women's Union, a countrywide organisation representing the rights and interests of women, which has a long experience in running microfinance schemes. The initial working capital was turned over more than twice during the first phase of the project (2001 to 2004) and was then transferred to subsequent phases to be revolved further. Combined with demand generation and hygiene promotion activities, the SRF helped around 200,000 households build sanitation facilities over the course of seven years. The revolving fund mechanism allowed leveraging household investment by a factor of up to 25 times the amount of public funds spent.

Repayment rates have been extremely high (almost 100%). This revolving fund programme in Vietnam compared very favourably with other forms of public support for sanitation, including indicators such as leveraging and effectiveness. Since 2004 this pilot approach has since been scaled up via other World Bank-funded projects and through the Vietnam Bank for Social Policies (VBSP). As of the end of 2011, VBSP had extended 3.5 million loans for water supply and sanitation and 3.1 million facilities had been built. The share of WATSAN loans as a percentage of the overall portfolio has been steadily growing year on year, from 0.86% in 2004 to 7.56% in 2009. Growth in WATSAN loan products is now a key driver of overall portfolio growth – 16% growth in 2011.

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