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Some aspects of performance of Micro Finance Institutions: A study of selected Asian Countries.

*Rashmi Jain *Nivedita sharma *Ashima Joshi

Abstract Microfinance, is banking the unbankables, bringing credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. Thus micro credit plays an important role in fighting the multi-dimensional aspects of poverty. This empirical study examines the growth and performance of micro finance institutions in different Asian countries and also highlight the need of credit as for economic development .Timely availability of credit in the right quantity and at an affordable cost goes a long way in contributing to the well-being of the people especially in the lower rungs of society. This paper would highlight some determinants for measuring performance of MFIs such as outreach of MFI and financial sustainability. Key words- Microfinance, Credit, outreach, financial sustainability

*Lecturer Prestige Institute of Management Dewas

IntroductionMicrofinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers."[1] Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Although microcredit is one of the aspects of microfinance, conflation of the two terms is endemic in public discourse. Critics often attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact.[2] Microfinance, the supply of banking services to the poor, is high on the public agenda and is attracting increased interest from academics. The development-enhancing aspect of microfinance has been recently recognised with the Nobel Peace Prize awarded to Mohammad Yunus and Grameen Bank. Microfinance is also increasingly becoming an investment opportunity. The total stock of foreign capital investment in microfinance more than tripled between 2004 and 2006, to US$4 billion, with the establishment of 40 new specialised international investment funds (Reille and Foster, 2008). A new type of firm, called Micro Finance Institutions (MFIs), has become the provider of microfinance services. A typical characteristic of an MFI is its dual mission to serve the poor and remain financially sustainable. Most MFIs are sponsored by donors, and they are often not-forprofit organizations. Strong MFIs are considered key to further development of the microfinance industry (C-GAP, 2004).

Observers of microfinance are increasingly pinpointing improved corporate governance as a key to enhance MFIs survival and growth. A recent report identified corporate governance as a principal risk facing microfinance, threatening its role as both a business and a social service (CSFI, 2008). However, studies by Mersland and Strm (Forthcoming) and Hartarska (2005) find that best practice governance mechanisms from regular firms in mature markets do not generally have much influence on the performance of the MFIs. Thus, there is a need for a different and more original approach to identify and better understand the governance mechanisms that can enhance MFIs long-term survival. In line with the recommendation in Mersland (Forthcoming), this paper uses a historical parallel found in savings banks to 115

identify and present corporate governance lessons for MFIs today. To my knowledge, this type of historical study represents a novel approach in both the microfinance and in the corporate governance literatures. Microfinance is not a recent phenomenon. In fact, several pro-poor banking systems preceded it. Some, like savings banks and savings and credit cooperatives, continue to be important banking organisations throughout the world, while others, like Irish and English loan funds, have disappeared (Hollis and Sweetman, 1998). Caprio and Vittas (1997) explain how the financial systems in developing countries today have several features in common with the financial systems of Western countries in the nineteenth century. They indicate that lessons from the past have policy implications for today. The aim of the original savings banks was developmental, similar to modern microfinance. These banks also remain competitive today (Crespi et al., 2004, ESBG, 2004). This paper suggests that modern MFIs can learn important lessons from savings banks. Moreover, the notfor-profit ownership structure found in most savings banks is similar to the many not-for-profit MFIs today. This paper aims to identify the governance mechanisms that enabled the survival and growth of the historical savings banks and to analyse whether modern MFIs can learn something from them. Modern microfinance was born as a response to the frustrated development resulting from subsidised rural credit in the 1950s and 1960s (Adams and Fitchett, 1992). Thus, learning from history is inherent in its philosophy. However, the importance of learning from banking history is generally unexplored in the microfinance literature, though exceptions do exist. Flting et al. (2006) drew a parallel between the early development of the Swedish savings 116

banks. Hollis and Sweetman (1998) identify lessons to be learned from six different historic European pro-poor banking systems (not the savings banks though), and these researchers (2004) also drew parallels with the seventeenth-century Irish loan funds. Seibel (2003) and Guinnane (2002) draw attention to how financial history demonstrates the need for appropriate legal frameworks in order to support the development of pro-poor financial systems. Moreover, Cull and Davis (2006) explain how an impressive variety of providers, including savings banks, were important in providing small- and medium-sized enterprises in the US and Europe with capital during the nineteenth century. However, no previous historical microfinance study has drawn attention to corporate governance. Besides member-owned cooperatives, the microfinance industry is dominated by not-for-profit, non-governmental organisations (NGOs; (Mersland, Forthcoming). Similarly, most of the savings banks are not-for-profit organisations. A not-for-profit organisation is influenced by several stakeholders, but no particular group or person can legally claim ownership or receive residual earnings from it (Hansmann, 1996, Mersland, Forthcoming). Thus, savings banks and not-for-profit MFIs are similar, both legally and economically. The corporate governance mechanisms affecting one type of organisation may therefore affect the other. One challenge in the governance of not-for-profit organizations is the fact that managers serving as agents are supervised by donor organizations, who also serve as agents (Varian, 1990). Thus, traditional board governance may be less effective in not-for-profit MFIs (Glaeser, 2002). A broader perspective is required and attempted in this paper. In order to identify the governance mechanisms that enabled the survival of savings banks, this paper reviews the historical literature on the subject. The findings indicate that bank associations, mismatches in liability/asset maturity (deposits on demand), local communities, 117

and donors risking their personal reputations were important tools to discipline managers and secure the survival of the banks. The banks operated under either a friendly regulatory regime or under no regime at all. In the initial years, the banks did not face much competition. However, competition gradually became a major factor in disciplining the managers, and it is considered one of the main causes for savings banks continued success in most markets today. The banks willingness to expand their mission by serving poor customers alongside the more wealthy helped their financial viability. These findings could prompt a revision in thoughts on microfinance governance, which stresses regulation and traditional vertical board control. The lessons from the savings banks indicate that a broader and stakeholder-based understanding of corporate governance is necessary to secure the long-term survival of a pro-poor banking system. Besides, the pursuit of financial objectives should be pragmatic. This paper proceeds as follows. Section 2 explores the early history of savings banks; Section 3 discusses theoretical views on microfinance governance; Section 4 identifies potential corporate governance mechanisms in pro-poor banking and discusses their relevance to historic savings banks and modern microfinance; Section 5 discusses previous findings in order to identify lessons for today; and Section 6 concludes. The term micro finance refers to small- scale financial service both credit and savingsthat are extended to the poor in rural, semi -urban and urban areas. The poor need micro-finance to undertake economic activity, smoothen consumption, mitigate vulnerability to income shocks ( in times of illness and natural disasters), increase savings and support self- empowerment. Micro credit is the most common product offering. Micro-finance in India is synonymous with micro credit; because savings, thrift and micro-insurance constitute a miniscule segment of the micro finance space. In India, most micro finance loans are in the range of Rs.5,000 to Rs.20,000( the Development and Regulation Bill, 20073, defines micro finance loans as loans with amounts not exceeding Rs.50,000 in aggregate per individual/ small enterprise). CRISIL estimates that around 120 million households in India continue to face 3 .This bill, which envisages the regulation of the microfinance sector is under the parliament consideration. Page 3 of 11

financial exclusion. This translates into a credit demand of around Rs.1.2trillion 4. MFIs are the main players in the microfinance space in India, their primary product is micro credit. Other players that extend micro finance services, in addition to their core business, include banks and insurance companies, agricultural and diary co-operatives, corporate organizations such as fertilizer companies and handloom houses and the postal network. Additionally there are specialized lenders, called apex MFIs that provide both loans and capacity building support to MFIs5. The differentiating factors of MFIs. MFIs differ from one another in terms of:- 1. Lending model 2. Loan repayment structure 3. Mode of interest rate calculation 4. Product Offerings 5. Legal structure In terms of lending model, MFIs may be classified as lenders to groups or as lenders to individuals. In India, MFIs usually adopt the group-based lending models, which are of two typesthe Self-Help Group(SHG) model and the Joint-Liability Group(JLG) / solidarity group model. Under the SHG model, an MFI lends to a group of 10 to 20 women. Under the SHG-bank linkage model, an NGO promotes a group and gets banks to extend loans to the group. Under the JLG model, loans are extended to and recovered from, each member of the group ( unlike under the SHG model, where the loans is extended to the group as a whole). The most popular JLG models are the Grameen Bank model (developed by Grameen Bank, Bangladesh) and the ASA model (developed by ASA, a leading Bangladesh based NGO-MFI). Most of the large MFIs in India follow a hybrid of the group models. 4 .The number of households facing exclusion has been arrived at by adding rural households facing financial exclusion (93million) and urban below poverty line (BPL) households (18 million). The average credit demand per household has been estimated at Rs. 10,000 per annum. 5 .National Bank for Agriculture and Rural Development, Small Industries Development Bank of India, Rastriya Mahila Kosha and Friends of Womens World Banking are the apex MFIs in India. The model of lending to individuals is similar to the retail loan financing model of banks. In India, MFIs adopting the group lending models extend individual loans to more Page 4 of 11

successful borrowers who have completed a few loans cycles as part of a group (who have relatively large credit requirements and good repayment bank record). Corporates and cooperatives typically diary firms and sugar mills are also known to undertake microfinance by extending credit to farmers, this helps the companies strengthen their procurement and distribution networks. MFIs are also differentiated on the basis of their loan repayment structures. Most MFIs following the JLG model adopt the weekly and fortnightly repayment structure. Those under the SHG model have a monthly repayment structure. MFIs lending to traders in market places also offer daily repayment, while MFIs extending agricultural loans have bullet and cash-flow based repayment structures depending on the crop patterns.MFIs following the JLG model charge flat interest rates of 12 to 18% on their loans, while MFIs following the SHG model charge 18 to 24% interest per annum based on the reducing balancing method. In addition to interest rates, some MFIs also charge a processing fee comprising a certain proportion of the loan amount sanctioned at the time of disbursement. Most MFIs in India are solely engaged in extending micro credit, a few also extend saving, thrift, insurance, pension and remittance facilities. For providing insurance facilities, MFIs have tied up with insurance companies and mutual networks (funds created by community-owned organizations), some MFIs also do underwriting on their own. MFIs offer savings services in two waysthe savings are either collected by the MFIs on the SHG. In the later method, the MFIs or NGOs encourage the SHG to collect savings/thrift from each member of the group on a weekly/monthly basis and rotate the savings/thrift among members. An MFI collecting savings from borrowers may either make it compulsory for borrowers/members to have savings with it, or offer voluntary savings services to both members / non-members. Only MFIs registered as cooperatives or depositing NBFCs can collect savings/ deposits, a few MFIs registered as societies and trusts continue to accept saving/deposits, and thus face regulatory risks (for more details, refer section on absence of regulatory control) By taking into account legal structures, MFIs may be classified as follows:- Page 5 of 11

Not for profit MFIs: ocieties (e.g such as Bandhan, Rashtria Seva Samithi and Gram Utthan.) S Public trusts( such as Shri Khetra Dharmasthala Rural Development Project, and community development centre.) Non-profit companies( such as Indian Association for savings and credit, and cash per micro credit) Mutual benefit MFIs Co-operatives registered under state or National Acts( such as Pustikar Lagh Vyaparik Pratisthan Bachat and sakh Sahkari Samiti Limited) Mutually-aided Co-operative societies ( MACS, such as Sewa Mutually Aided Co-operative Thrift Societies Federation Ltd.) For Profit MFIs Non-banking financial Companies (NBFCs, such as Bharatiya Samruddhi Finance Ltd, Share Microfin Ltd, SKS Microfinance Ltd and Spandan Sphoorthy Finance Ltd.) Producer Companies( such as Sri Vijaya Visakha Milk Producers Co. Ltd. Local area banks( the only such MFI is Krishna Bhima Samruddhi Local Area Bank.) Although microfinance is not a new concept, these days it is recognized as a most powerful and effective tool to reduce the poverty. The microcredit summit Campaign and the Millennium Development goals of halving extreme poverty by 2015 are based on microfinance. The first project of microfinance in Pakistan was initiated in 1960s when Dr. Akhtar Hameed khan implemented the idea of microcredit and launched the Comilla Project as an experiment of microcredit. After that, various initiatives were taken in the field of microfinance in the following decades including Orange Pilot Project in Karachi, Agha Khan Rural Support Program (AKRSP) etc. The Agricultural Development Bank of Pakistan currently known as (ZTBL)1 was established by the Government of Pakistan to provide credit to the poor farmers of the country. Microfinance has not gained repute up till 1990; however a boost to microfinance operations in Pakistan was given in 1996 when microfinance was recognized as a specialized activity. In 1996 establishment of first specialized microfinance NGO (Kashf Foundation) and establishment of first urban microfinance program (Urban Poverty Alleviation Program UPAP)2 were the two major institutions in the sector of microfinance in Pakistan. In 1998, the association of microfinance providers was formed named as Microfinance Group-Pakistan; in 2001, that association was converted into a formal organization named as Pakistan Microfinance Network (PMN)3. The purpose to establish the PMN was to focus on transparency, gathering news of microfinance, and performance reporting etc. In 2000 government realized the importance of microfinance and its role in poverty alleviation, an apex funding body was formed to provide funds to its partner organizations at the federal level namely the Pakistan Poverty Alleviation Fund (PPAF).

Moreover, the State Bank of Pakistan formed a separate division for microfinance; later in 2007, this division became a separate department for microfinance. MFBs; are regulated by the State Bank of Pakistan and all of these are new entrants in the market as compared to commercial banks with an average age of 3-4 years. The operations of MFBs are like the traditional banking system these are specialized banks for the poor people who normally were ignored by the formal financial system. In 2000, the government established a first MFB the Khushhali Bank in the history of Pakistan under the special ordinance. In 2001 Microfinance Institutions ordinance appeared and in 2002, the first private sector MFB started microfinance operations in the country, called the First Microfinance Bank Limited. Today there are different types of microfinance providers operating in the country, it includes microfinance banks (MFBs), specialized microfinance non-governmental organizations (NGOs), multidimensional NGOs, and rural support programs (RSPs). The Government of Pakistan has taken various initiatives to promote the microfinance sector like the MFBs are exempted from tax for the period of five year from 2007 and the national level strategy for microfinance was prepared by the SBP with the cooperation and consultation of (PMN), (CGAP)4 and other international agencies. The Prime Minister of Pakistan approved the National Strategy for Microfinance in February 2007. Poverty reduction remains a challenge for the Government of Pakistan. An interim Poverty Reduction Strategy Paper (I-PRSP) appeared in 2001. In 2003, a full-fledged poverty reduction strategy paper (PRSP) was prepared by the Government. In these strategies the main focus remained on microfinance as a poverty reduction tool. The Government of Pakistan launched the Microfinance Sector Development Program (MSDP) in collaboration with Asian Development Bank in 2000. The objectives of (MSDP) were to assist the poor with credit and providing different basic services like access to education, health, water and other basic facilities. The SBP and Securities and Exchange Commission of Pakistan (SECP) are regulating the financial sector of Pakistan and the MFBs; also require a license from SBP, these are Rational of the Study-

1. Outreach Indicator. The best measurement of outreach is straightforward: The number of clients or accounts that are active at a given point in time This indicator is more useful than the cumulative number of loans made or of clients served during a period. Among other distortions, cumulative numbers make an MFI offering short-term loans look better than one providing longer-term loans. The recommended measure counts active

clients rather than members in order to reflect actual service delivery: members may be inactive for long periods of time, especially in financial cooperatives. Interpretation. Expanding the number of clients being served is an ultimate goal of almost all microfinance interventions. But rapid expansion sometimes proves to be unsustainable, especially during an MFIs early years when it needs to design its products and build its systems. It has very seldom been useful for funders to pressure MFIs for rapid expansion.

4. Financial Sustainability (Profitability) Indicators. In banks and other commercial institutions, the commonest measures of profitability are Return on Equity (ROE), which measures the returns produced for the owners, and Return on Assets (ROA), which reflects that organizations ability to use its assets productively. ROE = After-tax profits Starting (or period-average) equity4 ROA = After-tax profits Starting (or period-average) assets These are appropriate indicators for unsubsidized institutions. But donor interventions more typically deal with institutions that receive substantial subsidies, most often in the form of grants or loans at below-market interest rates. In such cases, the critical question is whether the institution will be able to maintain itself and grow when continuing subsidies are no longer available. To determine this, normal financial information must be adjusted to reflect the impact of the present subsidies. Three subsidy-adjusted indicators are in common use: Financial Self-sufficiency (FSS), Adjusted Return on Assets (AROA), and the Subsidy Dependence Index (SDI). These measures are more complex than the indicators discussed previously, and there are slight variations in the ways of calculating each of them, so use of the references cited in Attachment B is encouraged. FSS and AROA use similar adjustments. An Inflation Adjustment (IA) reflects the loss of real value of an MFIs net monetary assets due to inflation: IA = (Assets that are denominated in currency amounts5 minus Liabilities that are denominated in currency amounts) times The inflation rate for the period. This adjustment is usually based on net asset values at the beginning of the period, but using period averages may be appropriate for MFIs that receive large grants, or other infusions of equity capital, during the period. A subsidized-Cost-of-Funds Adjustment (CFA) compensates for the effect of soft loans to the MFI: CFA = Period-average borrowings by the MFI times Market interest rate

minus Actual amount of interest paid by the MFI during the period A common benchmark for a market interest rate is the rate that commercial banks pay on 90-day fixed deposits. Arguably a more appropriate rate is a few points above the prime rate that banks charge on loans to their best customers, because few MFIs could actually borrow at a lower rate.6 Objectives 1. To find the leading country in micro finance among Asian countries in context of MFI, NAB.GLP. 2. To evaluate the performance of different countries in term of gross loan portfolios. 3. To find the relationship between

countries MFI NAB GLP Afghanistan 14.6 266771.8 84963828 20376433. Bangladesh 36.6 8 1.726E+09 India 83.4 12381251 1.41E+09 Nepal 29.6 476405.8 76001911 Pakistan 19.4 1119149.4 199953365 Sri Lanka 14.4 140720219 301251248

Micro Finance Institutions

10% 15%

7%

7% 18% Afghanistan Bangladesh India Nepal Pakistan Sri Lanka 43%

Number of active borrowers

0%

12%

7% 0% 1% Afghanistan Bangladesh India Nepal Pakistan Sri Lanka

80%

Gross loan Portfolio

2%

5%

8%

2%

Afghanistan Bangladesh India Nepal 46% 37% Pakistan Sri Lanka

Descriptive Statistics Mean MFI GLP NAB 33 29223372 63317671 6 Std. Deviation N 26.2074798 5 55223531.7 4 735963351. 2

6 6 6

This table displays descriptive statistics for each variable. This table displays descriptive statistics for each variable.The mean is the average value. The standard deviation measures the variability (or spread) of the values. N is the number of cases with non-missing values.

Correlations MFI Pearson Correlation MFI GLP NAB Sig. (1-tailed) MFI GLP N NAB MFI GLP NAB . 1 0.26833627 6 0.69637934 6 GLP NAB -0.2683363 0.69637935 1 -0.0772827

-0.0772827 1 0.3035781 4 0.06214177

0.30357813 8 . 0.44215336 0.06214177 0.4421533 1 6 . 6 6 6 6 6 6 6 6 6

The correlations table displays Pearson correlation coefficients, significance values, and the number of cases with non-missing values. Pearson correlation coefficients assume the data are normally distributed. The Pearson correlation coefficient is a measure of linear association between two variables. The values of the correlation coefficient range from -1 to 1. The sign of the correlation coefficient indicates the direction of the relationship (positive or negative). The absolute value of the correlation coefficient indicates the strength, with larger absolute values indicating stronger relationships. The correlation coefficients on the main diagonal are always 1.0, because each variable has a perfect positive linear relationship with itself. Correlations above the main diagonal are a mirror image of those below. The significance of each correlation coefficient is also displayed in the correlation table. The significance level (or p-value) is the probability of obtaining results as extreme as the one observed. If the significance level is very small (less than 0.05) then the correlation is significant and the two variables are linearly related. f the significance level is relatively large (for example, 0.50) then the correlation is not significant and the two variables are not linearly related. N is the number of cases with nonmissing values.

Varia bles Entered/Removed Variables Variables Entered Removed Method 1 NAB, GLP . Enter a All requested variables entered. b Dependent Variable: MFI This table displays the variables entered and/or removed at each step. he variables entered into Model model at each step are listed in the Variables Entered column. The variables removed from the model at each step are listed in the Variables Removed column. The Method column displays the selection method that was used to remove or enter the variable.

Model Summary R R Square 0.728861 0.53123874 1 3 8 0.21873125 23.1646364 a Predictors: (Constant), NAB, GLP b Dependent Variable: MFI This table displays R, R squared, adjusted R squared, and the standard error. R, the multiple correlation coefficient, is the correlation between the observed and predicted values of the dependent variable. he values of R for models produced by the regression procedure range from 0 to 1. Larger values of R indicate stronger relationships. R squared is the proportion of variation in the dependent variable explained by the regression model. The values of R squared range from 0 to 1. Small values indicate that the model does not fit the data well. he sample R squared tends to optimistically estimate how well the models fits the population. Adjusted R squared attempts to correct R squared to more closely reflect the goodness of fit of the model in the population. Use R Squared to help you determine which model is best. Choose a model with a high value of R squared that does not contain too many variables. Models with too many variables are often over fit and hard to interpret. Model Adjusted R Square Std. Error of the Estimate

ANOVA Model

Sum of

df

Mean

Sig.

Squares 1 Regression 1824.35886

a b

Residual 1609.80114 Total 3434.16 Predictors: (Constant), NAB, GLP Dependent Variable: MFI

Square 912.1794 2 3 536.6003 3 8 5

1.69992 3 0.320943

This table summarizes the results of an analysis of variance.The sum of squares, degrees of freedom, and mean square are displayed for two sources of variation, regression and residual.The output for Regression displays information about the variation accounted for by your model.The output for Residual displays information about the variation that is not accounted for by your model.And the output for Total is the sum of the information for Regression and Residual. A model with a large regression sum of squares in comparison to the residual sum of squares indicates that the model accounts for most of variation in the dependent variable.Very high residual sum of squares indicate that the model fails to explain a lot of the variation in the dependent variable, and you may want to look for additional factors that help account for a higher proportion of the variation in the dependent variable. The mean square is the sum of squares divided by the degrees of freedom.The F statistic is the regression mean square (MSR) divided by the residual mean square (MSE).The regression degrees of freedom is the numerator df and the residual degrees of freedom is the denominator df for the F statistic.The total number of degrees of freedom is the number of cases minus 1. If the significance value of the F statistic is small (smaller than say 0.05) then the independent variables do a good job explaining the variation in the dependent variable.If the significance value of F is larger than say 0.05 then the independent variables do not explain the variation in the dependent variable. Coefficient s Model (Constant 1 ) GLP NAB Unstandardized Coefficients B Std. Error 14.393690 20.66752666 5 1.8816E-1.02416E-07 07 2.4204E-08 1.4118EStandardized Coefficients Beta t 1.43587 4 0.54431 1.71436 Sig. 0.24655 3 0.62407 5 0.18497

-0.2158071 0.67970119

08 a Dependent Variable: MFI The unstandardized coefficients are the coefficients of the estimated regression model.In this example, the estimated model is female life expectancy = 82.677 - 0.662fertility - 0.240infant mortality. Often the independent variables are measures in different units. The standardized coefficients or betas are an attempt to make the regression coefficients more comparable.If you transformed the data to z scores prior to your regression analysis, you would get the beta coefficients as your unstandardized coefficients. The t statistics can help you determine the

relative importance of each variable in the model.As a guide regarding useful predictors, look for t values well below -2 or above +2.

Histogram Dependent Variable: MFI


2.5

2.0

1.5

1.0

Frequency

Normal P-P Plot of Regression Standardized Residua


.5 1.00 -1.00 -.50 0.00 .50 1.00 1.50

Dependent Variable: MFI = 0.00 Mean


N = 6.00

Std. Dev = .77

0.0

Regression Standardized Residual .75

Expected Cum Prob

.50

.25

0.00 0.00 .25 .50 .75 1.00

Observed Cum Prob

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