CIDA S MICROFINANCE GUIDELINES: SUPPORTING THE DEVELOPMENT OF INCLUSIVE FINANCIAL SYSTEMS. CIDA/Samuel Gervais

Transcription

1 CIDA S MICROFINANCE GUIDELINES: SUPPORTING THE DEVELOPMENT OF INCLUSIVE FINANCIAL SYSTEMS CIDA/Samuel Gervais

2 Canadian International Development Agency (CIDA) 200 Promenade du Portage Gatineau, Quebec K1A 0G4 Canada Telephone: (toll-free) For the hearing- and speech-impaired: (toll-free) Fax: Website: Her Majesty the Queen in Right of Canada, 2007 Catalogue No: CD4-48/2007 ISBN: Printed in Canada

3 CONTENTS 1.0 Preface Context for Developing Microfinance Guidelines CIDA s Experience in Microfinance Microfinance Guidelines Introduction Programming Guidelines Outreach Promoting Microfinance Institutions Building Industry Infrastructure Fostering a Conducive Policy Environment Coding Grants Versus Contributions Reviewing the Microfinance Guidelines Glossary of Terms Used iii

4 LIST OF ACRONYMS ASCA ATM CAMEL CIDA CGAP CRS DAC MED MDG MFI MFP MIX MCS NGO PAR PEARLS PSD RLF ROA ROE ROSCA SHG WOCCU Accumulating Savings and Credit Association Automated Teller Machines Capital adequacy, Asset quality, Management, Earnings, and Liquidity management Canadian International Development Agency Consultative Group to Assist the Poor Creditor Reporting System Development Assistance Committee Microenterprise Development Millennium Development Goal Microfinance Institution CIDA s Microfinance Focal Point Microfinance Information Exchange Microcredit Summit Campaign Non-governmental Organization Portfolio At Risk Protection, Effective financial structure, Asset quality, Rates of return and cost, Liquidity, Signs of growth Private Sector Development Revolving Loan Fund Return On Assets Return On Equity Rotating Savings and Credit Association Self-help Group World Council of Credit Unions iv

5 1.0 PREFACE As a donor agency with more than 35 years of experience in microfinance, the Canadian International Development Agency (CIDA) recognizes that access to financial services, such as credit, savings, insurance, and payment services, plays an important role in reducing poverty by enabling the poor to increase income, build assets, and reduce their vulnerability to unforeseen events. CIDA s goal is to ensure the permanent access to financial services by the poor, in particular women, by developing sustainable microfinance sectors. CIDA fulfils this mission by promoting strong retail institutions, supporting industry infrastructure, and fostering a conducive environment that ensures the appropriate role of government in building inclusive financial systems. 2.0 CONTEXT FOR DEVELOPING MICROFINANCE GUIDELINES CIDA has long recognized the need for microfinance guidelines to give greater direction to its microfinance operations. In 2002, CIDA s Performance Review Branch reviewed the Agency s microfinance and microenterprise development programming and identified areas that could best be addressed by formulating and implementing Agency-wide guidelines for microfinance. In 2003, following the Consultative Group to Assist the Poor s (CGAP) peer review of CIDA s microfinance operations, CIDA committed to developing such guidelines. Private sector development is a sector of focus for Canadian development assistance. CIDA identified access to finance as a priority. As such, it is important that CIDA put forward a clear vision for its microfinance programming. Microfinance: financial services for the poor Microfinance refers to the provision of financial services, such as savings, credit, payment transfers, and insurance, to the poor, so they can smooth their income, invest in economic opportunities, increase their assets, cope with emergencies, and plan for the future. Microfinance has proven itself to be an effective and powerful tool for alleviating poverty and reducing the vulnerability of poor women and men, and underpinning their ability to achieve the Millennium Development Goals on their own terms, in a sustainable way. 1 CIDA believes the provision of financial services can achieve a variety of indirect outcomes in addition to economic development, including meeting basic human needs, enhancing human rights, improving gender equality, children s health and education, and improving environment management. 3.0 CIDA S EXPERIENCE IN MICROFINANCE Since its inception in 1968, CIDA has supported microfinance and the development of microenterprise. 2 Traditionally, CIDA s support of microfinance has been linked to microenterprise development (MED), which aims to generate sustained income for poor women and men by establishing local enterprises. By providing services such as business development (skills training and marketing), social intermediation (group formation and development of self-confidence), microcredit, and credit with education programs (literacy training, health education, etc.), CIDA s MED programming aimed at creating employment, improving household income, decreasing vulnerability to external shocks, and increasing empowerment, particularly for women. 1. See CGAP Donor brief # 9, Microfinance and the MDGs at 2. Microenterprises are generally very small income-generating businesses, owned, managed, and operated by entrepreneurs who derive most of their livelihood from them. Supporting the Development of Inclusive Financial Systems 1

6 CIDA provided early support for microfinance in many countries, building solid partnerships with and responding to various Canadian, international, and multilateral institutions and organizations in order to contribute to the reduction of poverty. CIDA s strength lies in its extensive experience with these partners in providing retail-level microfinance services, the development and support of large microfinance networks in West Africa, and the global development of the cooperative/credit union model. CIDA has also demonstrated an ongoing commitment to focus on women, not only as clients, but also as members of the staff and management of microfinance institutions. CIDA has been active in international fora promoting microfinance, playing an active role in donor coordination, especially through its support to international organizations such as the World Bank-based Consultative Group to Assist the Poor (CGAP) the United Nations Capital Development Fund (UNCDF) and the Microcredit Summit Campaign (MCS) As a founding member of CGAP, a consortium of public and private development agencies working together to expand access to financial services for the poor in developing countries, CIDA has supported this organization s work and promoted its philosophy to ensure aid effectiveness in building inclusive financial systems that work for the poor. Established in 1966 as a special-purpose fund for small-scale investment in the poorest countries, the UNCDF works to help eradicate poverty through local development programmes and microfinance operations. CIDA contributes voluntarily to this fund, which aims to produce concrete results through programmes that pilot innovative approaches for replication on a larger scale. PAMECAS Network in Senegal Canada has been supporting the Union des mutuelles du partenariat pour la mobilisation de l épargne et du crédit au Sénégal (UM-PAMÉCAS) since This partnership opened the way to a network of financial cooperatives that is now mature and well-established. It reaches close to 200,000 individuals, of whom 60 percent are women. PAMECAS now cumulates savings of C$21 million and a total volume of credit of C$20 million, demonstrating the members trust in their institution. Throughout its development, PAMECAS steadily diversified its loans and savings products and improved the delivery of its services. Now the caisses are partially computerized, are experimenting with smart cards, and are introducing automated teller machines (ATMs). Wanting to redistribute its annual surpluses to the communities, PAMECAS launched its own foundation that will focus on health, education, and cooperation. PAMECAS success is a good illustration of the rich Canadian experience in developing and strengthening the cooperative model, which can contribute significantly to the local and regional socioeconomic development of developing countries. Since its inception in 1997, through an advocacy campaign, the MCS pursues its goal of reaching 100 million of the world s poor families with credit for self-employment and other financial and business services by CIDA has supported this private initiative to ensure that microfinance evolves without leaving the very poor behind. Between 2000 and 2005, annual expenditures in microfinance ranged from 0.82 percent to almost 2 percent of the total CIDA budget, for projects in Asia, Africa, the Americas, Europe, and the Middle East and the Maghreb (EMM) region, averaging approximately $32 million per fiscal year. Asia Branch manages projects with the largest budget. The Canadian Partnership Branch (CPB) manages the largest number of projects, in partnership with Canadian and international organizations. 3. At the 2006 Global Microcredit Summit in Canada, the Microcredit Summit Campaign reset its goals for Supporting the Development of Inclusive Financial Systems

7 Distribution of Microfinance Disbursements by Branch Fiscal Year Guide for the Micro-finance Sector to CIDA officers in a compact and user-friendly form. 4.0 MICROFINANCE GUIDELINES Africa 17% Multilateral 2% Asia 33% Written primarily for CIDA officers, these guidelines aim to improve the effectiveness of CIDA s microfinance programming by providing officers with advice and to give greater focus to CIDA s microfinance operations. CPB 28% 4.1 Introduction EMM 11% Americas 9% CIDA focuses on building sustainable microfinance institutions (MFIs) that reach the poor, on the understanding that strong MFIs that follow good banking principles are best positioned to reach the greatest number of poor women and men. 4 In turn, establishing and reaching social goals is also good for business and can reinforce a MFI s financial performance. CIDA encourages MFIs to monitor their social performance to ensure they remain focused on their mission. CIDA supports MFIs that promote environmentally sustainable patterns of economic activity, recognizing that measures that stimulate job creation and economic growth can have direct environmental consequences, and that environmental degradation can restrict economic opportunities. 5 From a donor perspective, microfinance projects must be approached realistically, in line with good practices, in order to ensure effective design and proper monitoring for maximum impact. Hence, the need for programming guidelines that update and bring the 1999 CIDA Reference Problematique Imagine having no access to financial services: no chequing account, no credit card, no health, property or life insurance, no pension, or no safe place for your savings. This is the day-to-day reality for the majority in developing countries. However for the poor in developing countries, there is the added challenge of low and often uncertain income. How do they get the money to tide their family over until they sell their crops? How do they pay for emergency medical treatment for their loved ones? Where do they get the capital to start up their own micro-enterprise? Often from the village moneylender at usurious interest rates, by selling productive assets that will be difficult to replace, or by depending on the meagre savings of family and close friends. Arguably, the poor need financial services even more than the non-poor. Access to well-functioning institutions that provide quality financial services can empower individuals economically and socially, allowing them to better integrate into a country s economy by actively contributing to economic growth, while giving them a stake in their immediate community. Microfinance initiatives are present in practically every developing country, and some progress has been made to help integrate these into formal 4. Morduch, Jonathan. The Microfinance Schism, World Development, Vol. 28, Environmental Sourcebook for Micro-Finance Institutions (PDF 225 KB - Summary in French) and The Environmental Colours of Microfinance Theory Supporting the Development of Inclusive Financial Systems 3

8 financial systems. Yet, the majority of bankable individuals remain unbanked. It is estimated that in most developing countries, under 10 percent of low-income households have access to basic lending and saving services. 6 Definition Microfinance refers to the provision of a range of financial services to poor women and men to enable them to increase their incomes, build assets, and reduce their vulnerability to unforeseen events or external shocks. Microfinance includes microcredit, which is likely the most visible form of microfinance, but also savings, microinsurance, money transfers, and other basic financial services. Many microfinance providers also offer to their clients, as a complement to financial services, nonfinancial services such as literacy and numeracy training, health and environment awareness programmes, and business development services. These non-financial services are offered on the basis of donor subsidy or by charging clients, and should be accounted separately in a MFI s financial costs. Vision The poor live in a world where they have reliable access to a range of sustainable financial services tailored to meet their needs at affordable prices. Reliable because the poor can access these services whenever they need them. Sustainable because these financial services are operated on commercial principles without the need for subsidies. Affordable because the poor are willing and able to pay for these services. The financial products offered allow the poor to meet their basic consumption requirements (for things such as food, clothing, and shelter) without needing to sell off assets or curtail consumption, to invest in income-generating opportunities and in their family s health and education, and to manage risk by reducing their vulnerability to unforeseen events. Goal CIDA s goal is to increase reliable access to sustainable financial services by the poor, in particular poor women. Objectives CIDA s microfinance programming aims to contribute to: promoting strong microfinance institutions (microfinance non-governmental organizations (NGOs), credit unions, credit and savings cooperatives, rural banks, etc.); building industry infrastructure (wholesale organizations, credit bureaus, rating agencies, auditors, specialized training centres, technology, research, etc.) that supports the development of inclusive financial systems; and; fostering condusive policy environments, ensuring governments play an appropriate role in building reliable and secure financial systems that work for the poor. 4.2 Programming Guidelines The following programming guidelines provide CIDA officers with advice on what to look for when planning, identifying, and monitoring the implementation of a microfinance initiative. Any initiative falling outside these programming guidelines needs to be explicitly justified, should CIDA s support nevertheless be considered. Microfinance has evolved rapidly in the last decade, moving beyond the simple provision of productive microcredit, 7 becoming more responsive to low- 6. Women s World Banking. UN Expert group + 10 Building Domestic Financial Systems that Work for the Majority, Productive microcredit refers to a loan intended for investment in an income-generating activity, such as in a business. 4 Supporting the Development of Inclusive Financial Systems

9 income individuals diverse needs for financial products and services. The industry has recognized the importance of deposit services (savings) and the role of insurance in helping the poor to better manage risk, as well as the need for affordable money transfers, including remittances, and a variety of flexible credit products, such as education and housing loans. Microfinance is only one of many tools for poverty reduction. Other instruments, such as the provision of shelter and food aid, may be more appropriate in meeting the needs of the poorest of the poor. Some programmes have demonstrated success in graduating very poor individuals into microfinance clients, but this will not be covered in this document. 8 For the purpose of these guidelines, the focus of microfinance initiatives is primarily on the economically active and low-income poor, meaning those who have some form of income-generating activities or have the funds required to participate in the savings component of microfinance Outreach CIDA supports microfinance initiatives that target primarily the economically active poor and lowincome individuals, with a particular focus on poor women. Microfinance best serves individuals who have some form of income-generating activities or have the funds required to participate in savings services. The poor need a variety of financial services, not all demand microcredit, and many prefer to be able to place their savings, no matter how small, in a secure account. Microfinance acts as a catalyst, but cannot itself create economic opportunities. For microcredit to be appropriate, clients must have the capacity to repay the loans under the terms by which they are provided. Microcredit may not be suitable for all, particularly where loan repayment conditions pose severe challenges, either due to the individual s own circumstances or the difficult situations in which they find themselves. For example, the destitute and other vulnerable groups may have great difficulty repaying loans. In such cases, small grants, infrastructure improvements, or education, training and graduating programmes may be more effective because credit may only burden them with inappropriate debt. Women make up a disproportionate percentage of the poor, yet it is recognized that the poorest households tend to rely more heavily on women s income. Microfinance is often referred to as women s finance. Evidence has shown that women clients are more inclined than men to invest in the family s health and education. The income women derive from their business activities often acts as an economic safety net. Their expenditures on health and education benefit their community as a whole, enhancing the human resource base, thus contributing to national development goals. Access to microfinance has demonstrated the capacity to enhance a woman s status in the community and affect positively her ability to act against violence in her home. However, in many areas, women remain marginalized as microfinance clients. Improving women s access to and benefit from financial services requires careful attention to the social cultural barriers that may have previously limited their participation in this area and calls for gender-sensitive design and proactive strategies to address gender issues. Microfinance can have a positive impact on children s development when their parents have access to microfinance services, such as education loans, when they can access a savings account and also if they work within micro- or small enterprises that benefit from microfinance or when older they, themselves, seek to start their own enterprise. Recognizing the fact that many children in developing countries do not have adult family members to support them (such as AIDS orphans, war-affected children, and 8. See CGAP s Focus Note, Graduating the Poorest into Microfinance (PDF 269 KB) Supporting the Development of Inclusive Financial Systems 5

10 street children) and must work to ensure their own and their family s survival, special attention needs to be given to the working conditions of these child workers to ensure non-harmful practices while providing the children with continued access to education and leisure time. 9 In order to support employment and wealth creation for young entrepreneurs, efforts need to be made to develop their capabilities and expand their access to resources. Although providing youth 10 with financial services can be risky and costly, and often requires integrating non-financial services such as capacity-building programmes, many subsidized pilot projects are being tested to assess how to best meet the needs of this underserved population Promoting microfinance institutions The term microfinance institution (MFI) refers to a direct financial service provider: an institution that provides financial services to poor and low-income individuals. Part of what is commonly known as the micro level, these MFIs fall into two categories: informal and formal institutions. Informal institutions (Non-legal entity e.g. solidarity group, self-help group [SHG], rotating savings and credit association [ROSCA], communitymanaged revolving loan fund [RLF], village savings and lending association [VSLA]). CIDA should avoid providing loan capital to informal institutions because past experience has demonstrated that funding the capital base of such groups has not generally been successful in developing financially sustainable mechanisms. 11 CIDA can support informal institutions by providing training and capacity building (e.g. in bookkeeping, liquidity management, performance monitoring) Youth Savings Clubs in Ghana Recognizing the need to shift the demographics of credit union membership to include a greater proportion of youth to ensure a steady membership participation in credit unions, the Ghana Credit Union Association introduced the Youth Savings Clubs. Through the program, savings clubs are set up and maintained in secondary and tertiary academic institutions, where youth are encouraged to practice better spending habits by putting aside pocket money each day as savings. When students eventually leave school, they often use the funds saved to further their education. At other times, they do not collect their deposited savings, but instead maintain their membership until they find employment and join a credit union. The youth savings component supports the economic development of the country by encouraging youth participation that will later provide a feeder into the credit union movement thus sustaining its overall membership while senior members retire. Youth Savings Clubs coach young people to develop the habit of managing their money responsibly, thereby planning for a future after secondary school. and technical assistance to strengthen their institutional capacity, and by promoting and disseminating the methodologies employed by some informal institutions, particularly savingsbased organizations that work in rural areas. Formal institutions (Legal entity e.g. microfinance NGOs, credit unions, microfinance banks, financial cooperatives). The primary institutions that can be supported are microfinance NGOs, financial cooperatives, credit unions, and savings institutions. The focus can be on technical 9. There is a growing shift within the international development community, away from ending all child labour to ending harmful child labour. Efforts to eliminate all child work are not always in the best interests of the child. Many experts agree that non-harmful work can provide a child with an income, a sense of accomplishment, and valuable economic and socialization skills that are beneficial to the child s development. 10. The Convention on the Rights of the Child defines as children all human beings under the age of 18, unless the relevant national laws recognize an earlier age of majority. The United Nations generally uses the term adolescent for the age range 10 to 19, young people for those aged 10 to 24, and youth for those aged 15 to See CGAP Focus Note 36, Community-Managed Loan Funds at 6 Supporting the Development of Inclusive Financial Systems

11 assistance to enable these institutions to reach down to poorer clienteles and expand their outreach, specifically where market penetration is low. CIDA can assist them to improve and diversify the product offering and delivery, strengthen their corporate governance and management, strengthen their capacity to attract commercial sources of funding, and develop more efficient management systems. CIDA may provide loan capital to formal institutions; however, because subsidies may provide disincentives to the MFI or cause distortions in the market, these need to be designed, planned, and evaluated carefully, in consultation with a microfinance specialist. MFIs with the following characteristics have shown demonstrable capacity to provide sound assistance: a clearly articulated mission to reach the lowincome market on a financially sustainable basis; a solid understanding of their potential clients; financial products and services designed to meet market demand within the target population; a credible business plan for achieving financial sustainability within a reasonable time frame; a strong and accountable management team and a functioning governance structure; and good systems in place to maintain transparent accounting and internal audits, which allow for appropriate performance and financial reporting. These can be identified through an institutional assessment 12 conducted by the Canadian or international implementing organization. Several organizations websites, such as the Microfinance Gateway the Small Enterprise Education and Promotion (SEEP) Network Développement international Desjardins, and Microsave, 13 offer practical resources that CIDA officers can consult in order to learn about the various technical areas of MFI management, such as product design, costing and marketing, business planning, human resource management, risk management, and impact assessment. CIDA interventions to promote strong retail institutions can be done in various ways: by supporting the work of a Canadian or international organization, which is in direct partnership with an MFI; through pooled donor funding designed to promote microfinance within a country in a coordinated manner (this resembles support for an Apex organization, which is described in the next section); or by providing technical assistance alongside a microfinance fund that invests in established MFIs that promise to extend their outreach. Organizations that are selected to execute a CIDA-funded microfinance intervention need to have proven capacity 14 and technical expertise in the field of microfinance. Credit Components At times, microfinance takes the form of a credit component 15 in a multi-sectoral development project. For example, the credit is part of a project that focuses on agriculture or vocational training and is used for purchasing raw material or for starting up a business. The credit, which is offered directly by the project or channelled through a financial institution, is targeted at a particular group for purchasing an input or changing behaviour. Evidence has shown that credit components often perform poorly and rarely develop into the sustainable provision of financial services to the target beneficiaries after donor funding has ceased. 12. See for example, CGAP s Format for Appraisal of Microfinance Institutions and The Poverty Audit at See, Desjardins Développement international/publications and MicroSave/Toolkits Evidence of capacity based on prior support to MFIs that have been able to recover loans/increase outreach. 15. See, CGAP Donor Brief #10 on Credit Components Supporting the Development of Inclusive Financial Systems 7

12 Funding credit components of broader projects, given their history of poor performance to date, will not yield good results. Supporting 100 percent microfinance projects, on the other hand, have shown significant measures of success. Reasons credit components perform poorly lending criteria is in place to adequately assess borrowers ability to repay credit (e.g. participation in other aspects of the project does not mean automatic access to credit); and information and accounting systems using international standards are in place that allow reporting on performance to CIDA. Conflicting objectives of the various sectors of the project often de-prioritize the importance of financial sustainability of the credit component; confusion among implementers and clients as to whether the credit component is a resource transfer or a financial service that needs to be repaid; non-specialized organizations often lack technical background to effectively manage microloans and do not have commitment to long-term credit delivery; incorrect assumptions about access to credit being a constraint to project success; and time for an MFI to reach financial sustainability is generally longer than the typical project lifespan. Nevertheless, if a credit component is designed and managed in compliance with good practices, it can be an important and useful adjunct to other interventions. To be considered for funding, any proposal with a credit component must be reviewed by a microfinance specialist to verify that it meets the following criteria: the credit component is to be handled through an established financial institution, or an organization with experience in providing financial services; a business plan has been elaborated and demonstrates the ongoing viability of the credit scheme after project funding terminates; market, not subsidized, interest rates are used for lending; 16 Technology Technology has helped microfinance institutions improve their efficiency, track operations with more accuracy, increase transparency, and reach new customers. From management information systems that produce the reporting and disclosure that meet international standards for financial transparency, to delivery technologies, such as transactional software, smart cards, mobile phone transfers, Automatic Teller Machines (ATMs), and hand-held computers that are enabling microfinance providers to expand their outreach and improve their services, technology holds great promise to help developing countries overcome barriers to the development of financial systems that serve the poor. See CGAP S Technology Resource Centre: Planning, Monitoring, and Evaluating Support to a Microfinance Institution CIDA is committed to the principles of results-based management as a means of enhancing the effectiveness of its aid. Careful planning and monitoring of microfinance initiatives is important in order to ensure that CIDA interventions are generating the intended results. As with other initiatives, this means identifying suitable performance indicators and targets for these indicators, establishing baseline information, and then monitoring them on a regular 16. See CGAP Donor Brief 6, Making sense out of Microcredit Interest Rates at 8 Supporting the Development of Inclusive Financial Systems

13 basis through regular reporting and on-site validation. As well, provisions should be made for adequate support from other sectoral specialists (e.g. environment, gender) as required. When providing assistance at the micro level, the concept of the double bottom line 17 or balancing both financial and social objectives must be central to developing strong MFIs. Generally, this entails identifying if CIDA support is helping MFIs move toward sustainability while continuing to serve effectively the needs of the target population. Financial Performance In seeking to assess an MFI s financial performance, the key is in understanding the progress of the MFI toward financial sustainability and how well it is collecting its loans. Thus, reference is usually made to a select number of financial performance indicators. 18 MFIs that offer the traditional banking services of loans and deposits (credit and savings) have benefited from the development of common accounting standards by groups such as ACCION Inter-national (ACCION CAMEL initially created for commercial lending institutions, and now adapted for MFIs), the World Council of Credit Unions (WOCCU developed a monitoring and supervising tool called PEARLS for financial cooperatives), and a few others. When used, these common accounting standards generate a large amount of financial information that can be used to assess financial performance. The challenge is in getting the MFI or the executing agency to produce reporting that can help CIDA officers monitor the financial performance in a meaningful way. The Microfinance Information Exchange (the MIX) was created by CGAP partly to improve MFIs transparency through increased standardized reporting. Some donor agencies require MFIs to report to the MIX, and then monitor on the basis of this reporting. This can also lead to harmonization in reporting requirements when other donors adopt a similar strategy. To monitor an MFI s financial performance, officers can require the MFI to report to the MIX. If the MFI already uses the MIX, officers can consult the MIX website to access the MFI s reports. Where support is being provided specifically for developing microinsurance services, different financial performance indicators need to be employed. Officers are advised to consult their branch s microfinance specialist. They can also look at some suggested indicators developed by the CGAP Working Group on Microinsurance 19 and should refer to the Micro Insurance Centre website for more information on the subject. Social Performance CIDA officers are advised to consult their microfinance specialist who is best placed to determine, in the context of a particular initiative, which financial and social performance indicators are most appropriate to monitor. All projects should have a business plan indicating clearly what kind of products they will provide, to whom, and how, and by when they intend to reach sustainability. Officers can refer to a number of publications for further guidance on the issue, including CIDA s Reference Guide for the Microfinance Sector, 20 CGAP s Microfinance Consensus Guidelines, 21 and the Microfinance Gateway. 17. The double bottom line refers to institutions aiming for both profitability and impact related to a social mission. 18. These generally assess the portfolio quality ( Portfolio at risk [PAR>30 days] or annual loan-loss rate ), and financial sustainability ( return on assets [ROA] or return on equity [ROE], financial self-sufficiency [FSS] or operational self-sufficiency [OSS]) See, CIDA s Reference Guide for the Microfinance Sector, Chapter See, "Preliminary Donor Guidelines for Supporting Microinsurance", p. 24. (PDF 730 KB) See, CIDA's Reference Guide for Microfinance Sector, p. 53. (PDF 490 KB) See (PDF 291 KB) and (PDF 517 KB) Supporting the Development of Inclusive Financial Systems 9

14 Performance Indicators Social performance indicators are not as well-developed or standardized and can vary depending on the MFI s stated mission. Social objectives derived from the MFI s mission can translate into indicators that will generally measure the MFI s outreach 22 to clients as well as the MFI s responsiveness to clients needs, their families, and communities. Unlike financial indicators, which can be used to track an MFI s progress in attaining financial sustainability, social indicators for an MFI generally do not provide information on clients progress toward improving their personal situations, but rather help determine if the MFI is maintaining a focus on its social mission. That said, ways to assess an MFI s clients progress have been developed in recent years, and efforts are underway to measure and manage social performance. 23 In CGAP s Good Practice Guidelines for Funders of Microfinance, 24 MFI s performance should be monitored, at minimum, in the following areas: 1. Outreach: How many clients are being served? Indicator: number of active clients 2. Depth of outreach: How poor are the clients? Indicator: average first loan size or average outstanding loan balance per client 3. Portfolio quality: How well is the MFI collecting its loans? Indicator: portfolio at risk > 30 days and write-off ratio 4. Financial sustainability: Is the MFI profitable? Indicator: return of assets (ROA) or adjusted return on assets (AROA) 5. Efficiency: Is the MFI providing services at the lowest possible cost to clients? Indicator: cost per client or operating expense ratio All projects require: the involvement of a microfinance specialist in the phases prior to project approval, as well as during project monitoring; and regular reporting on a core set of social and financial indicators (as determined by the specialist, the project officer, and the executing agency), against which progress can be clearly measured Building Industry Infrastructure For microfinance to reach its potential, technical service providers, credit bureaus, rating agencies, professional microfinance networks, training centres, trade associations, and wholesale financial organizations are needed to increase outreach, reduce transaction costs, and promote transparent reporting. Often referred to as the meso level, this microfinance infrastructure needs to be developed and strengthened in order to facilitate the emergence of strong MFIs. To further strengthen microfinance infrastructure, CIDA can: support and strengthen the capacity of microfinance networks or associations 25 to help MFIs expand their outreach, improve their services, standardize their reporting, share costs, and develop a credible lobby for policy change; support wholesale financial organizations, such as Apex 26 or second-tier organizations, that channel funding (e.g. grants, loans, loan guarantees) and other services to multiple MFIs; 22. Outreach to measure how many clients are being served (# of active clients/accounts) and Depth of Outreach to measure the poverty level of clients (e.g. average loan size, account size as proportion of Gross National Income [GNI]). 23. See, The Microfinance Gateway/Social Performance Resource Centre See, CGAP's Good Practice Guidelines page 32. CGAP's Microfinance Consensus Guidelines: Disclosure Guidelines for Financial Reporting by Microfinance Institutions, and Definitions of Selected Financial Terms, Ratios and Adjustments for Microfinance, both at The Microfinance Gateway website. 25. See, SEEP Network's Technical Note on Effective Donor Strategies to Support Microfinance Associations (PDF 175 KB). 26. See, CGAP donor brief 5, Apex Institutions in Microfinance at 10 Supporting the Development of Inclusive Financial Systems

15 facilitate linkages between these wholesale organizations and MFIs; help develop local markets for businesses that provide technical services to MFIs, including management training, payment transfers, information technology, and marketing; develop and strengthen credit bureaus and rating agencies for increased transparency and to standardize social, environmental, and financial performance reporting by MFIs; support research initiatives aimed at understanding client demand for financial services, improving products and services, and assessing the impact of microfinance; and support the development and testing of new models and innovative approaches that promise to help broaden the outreach of microfinance to hard-to-reach and marginalized groups (such support can also be done at the micro level). Planning, Monitoring and Evaluating Support to Industry Infrastructure Monitoring the progress of initiatives at the meso level is less standardized than monitoring an MFI s performance because common indicators are difficult to establish. Nevertheless, two kinds of indicators should be identified: institutional capacity building and financial sustainability. As with microlevel interventions, baseline information and targets against these two kinds of indicators should be established and monitored for regularly. The Microfinance Gateway has a Resource Centre 27 that offers information on a number of intermediary services, including technology, auditing, impact, and rating. The MIX Market can also be consulted for information on MFI networks, raters, and evaluators. As with initiatives at the micro level, microfinance specialists should be consulted on the most appropriate indicators to be used Fostering a Conducive Policy Environment Governments have an important, constructive role to play in developing inclusive financial systems 28 to protect consumers from fraudulent practices while ensuring that various types of institutions can compete fairly in the delivery of financial services. Country-led vision and strategies, that reflect good practices and the national context need to be elaborated and implemented in order to foster an environment that is conducive to developing an inclusive financial system, that works for poor women and men, and ensures environmental sustainability. Donor support at this macro level promotes policy development that reflects the needs of developing countries, MFIs, and their clients. To ensure an environment that enhances MFIs provision of sustainable services, CIDA can assist partner countries in: elaborating and implementing microfinance strategies; formulating policy, legislation, and regulation for the microfinance sector; and applying laws and regulations through effective oversight of the microfinance sector. Elaboration and Implementation of Microfinance Strategies 29 A country s vision and strategy for building an inclusive financial sector need to be developed with the participation of all stakeholders, including policy makers, regulators, MFIs, commercial banks, and microfinance clients. They need to reflect the variety 27. See, See, CGAP Donor Brief 19 on the Role of Governments in Microfinance at and the UN Blue Book, Chapters 5-8, at See, the UN s Blue Book, Chapter 8 at Supporting the Development of Inclusive Financial Systems 11

16 of microfinance providers and the diverse needs of clients, as well as good practices that have been established, based on the lessons learnt over the last two decades. Formulation of Policy, Legislation, and Regulation for the Microfinance Sector 30 The key to successful policy change is not only in adopting new policies or regulations, but most importantly, in effectively implementing them and in monitoring the environment accordingly. Take the example of interest rate liberalization. It has been recognized that interest rate ceilings can restrict the poor s access to microcredit by inhibiting the financial viability of MFIs. 31 Lifting interest rate caps, however, needs to be accompanied by alternative methods for protecting consumers such as measures to promote transparency and accountability of stakeholders. Application of Laws and Regulations through Effective Oversight of the Microfinance Sector 32 CIDA can, for example, assist a central bank, or the agency in charge of financial sector supervision, in building its internal capacity to supervise the microfinance sector and assist in developing a specific financial policy. In such cases, capacity-building indicators should be established and monitored independently of the policy adoption and implementation. Interventions at the macro level are more lasting than interventions at the micro or meso levels, sometimes even irreversible, and affect the microfinance sector as a whole. Officers and executing partners require specialized technical expertise to intervene effectively at this level. Planning, Monitoring, and Evaluating Support to the Policy Environment Monitoring projects at the macro level should be treated similarly to projects at the meso level, taking into account capacity-building indicators and implementation indicators. Furthermore, the consultative processes also need to be monitored to ensure that all relevant stakeholders were consulted. CGAP has produced a document entitled Microfinance Consensus Guidelines: Guiding Principles on Regulation and Supervision of Microfinance. 33 Its website has a section dedicated to Regulation and Supervision, 34 which offers a wealth of information and resources on the subject, including laws and regulations for more than 50 different countries. 35 Both resources provide useful background information on this topic. The Microfinance Gateway and the MIX website can also be consulted to better understand national environments Coding Before determining which code to use, CIDA officers should assess the budget to determine the relationship between the microfinance outputs and the funds allocated to microfinance. Microfinance outputs should be coded under the Banking and Financial Services Primary Level DAC code (24000), or under the Agriculture Financial Services DAC code (31193), if the initiative deals specifically with financial services for agriculture: 30. See. Guiding Principles on Regulation and Supervision of Microfinance (PDF 189 KB) See, CGAP Donor Brief 18 on the Impact of Interest Rate Ceilings (PDF 195 KB) See, CGAP Donor Brief on Regulation and Supervision (PDF 26 KB) See, the Microfinance Consensus Guidelines Guiding Principles on Regulation and Supervision of Microfinance (PDF 261 KB) or the Regulation and Supervision of Microfinance abstract (PDF 116 KB). 34. See, the Microfinance Gateway's Regulation and Supervision Resource Center See, the Microfinance Gateway's Country s Profiles See, the MIX Market's Environment Search 12 Supporting the Development of Inclusive Financial Systems

17 DAC 5 CRS Clarifications/Additional notes Code Code Description on coverage 37 Micro level: Promoting informal and formal microfinance institutions Formal sector financial intermediaries Informal/semi-formal financial intermediaries Education/training in banking and financial services Agriculture financial services Meso level: Building industry infrastructure Support to formal microfinance providers (e.g. banks, non-bank financial institutions, financial cooperatives, microfinance NGOs). Support to informal microfinance providers (e.g. informal savings and credit cooperatives, ROSCAs, ASCAs, VSLAs, Self-help groups). Training for formal and informal microfinance institutions. Support to agriculture finance providers Formal sector financial intermediaries Support the microfinance infrastructure/ microfinance service industry (e.g. credit bureaus, rating agencies, microfinance networks and associations, technology providers) Education/training in banking and financial services Training for microfinance infrastructure/microfinance service industry Agriculture financial services Support the microfinance infrastructure related to the agriculture finance industry. Macro level: Fostering a conducive policy environment Financial policy and administrative management Support to formulate and implement policy, legislation, and regulation for the microfinance sector (e.g. government, central banks). Common Coding Errors A common misunderstanding involves coding under the sector block 15100, Governance and Civil Society, that has been used as a catch-all code for projects or programs that engage recipient governments or civil society. A project that entails strengthening a civil society organization, such as a financial cooperative, should be not be coded under sector 15150, Strengthening Civil Society, but, rather, under the Banking and Financial Services code (24000), Formal financial intermediaries (24030). Strengthening a country s central bank s capacity in microfinance 37. Clarifications presented here have been modified from CRS list of purpose codes to reflect inclusive financial systems terminologies. Supporting the Development of Inclusive Financial Systems 13