Corporate-level evaluation

Introduction

This Agreement at Completion Point (ACP) was drawn up at the end of the Corporate-level Evaluation (CLE) of IFAD’s Rural Finance Policy (RFP) and operations. The ACP represents the IFAD Management’s agreement on the evaluation’s main findings and to adopt and implement its recommendations.  The methodology of the CLE was developed at the end of 2005. The phases of the evaluation (namely preparation, fieldwork, reporting, and providing feedback) took place between February and November 2006.
The CLE addressed three questions: (i) does the RFP meet best practice standards of the rural/microfinance industry and provide practical guidance to IFAD operations; (ii) has the RFP been put into practice; and (iii) has IFAD deployed the right resources, instruments, and processes to implement the RFP?  The scope of the evaluation included the RFP and supporting documents, IFAD corporate policies and strategies, all 6 regional strategies, country strategic opportunities papers, and an in-depth analysis of 58 projects in the 20 countries included in the CLE. Projects in ten of the countries were visited.
The CLE was carried out by a team of independent evaluators, who worked under the guidance of the Deputy Director, Office of Evaluation. It benefited from the interaction with International Fund for Agricultural Development (IFAD) staff and managers and from the feedback of the core learning partnership, in which all divisions of the Programme Management Department (PMD) and of the Policy Division were represented.

Main findings of the evaluation

Financial services are important to rural poverty reduction. Still, only 10 per cent of the rural poor have access. Financial systems have seen great changes in the past ten years that have left most developing country national financial systems generally stronger, but not typically to the benefit of the rural poor. Microfinance has emerged as a potential pro-poor financial sector counterweight to these developments, but its application to rural areas has neither been straightforward nor rapid. As a result, access to financial services is extremely limited in most rural areas, leaving millions of rural poor dependent on no or inappropriate financial services, to their own detriment and that of rural development in general. While not a panacea to poverty reduction, rural financial services go hand in hand with promoting rural development and the alleviation of poverty. 

IFAD – potential leader in rural finance. IFAD’s pioneering rural finance work has faced great challenges helping to establish pro-poor financial systems. It is also a sector for which IFAD has a relatively comprehensive set of ingredients (the RFP, Rural Finance (RF) Action Plan, RF Decision Tools, regional partnerships, monitoring tools, etc.) that can make up a strategic approach to sector development. Past experience, the impressive volumes of IFAD lending, the existence of the RFP and commitment to improved development effectiveness leaves IFAD potentially the most important global actor in rural finance. It is, certainly, the only one solely focused on rural areas. However, for the time being, IFAD is leading mostly in terms of the sizable level of its overall investment in this sector.

RFP – meeting best practice standards in some areas, not in others. The RFP has proven to contain a number of elements that are best practice, although some areas of the Policy lack clarity and need to be improved to meet latest best practice standards. The RFP provided a general framework to develop regional and country strategies and project design, but without setting clear policy directions for expected norms and standards. The RFP is not sufficiently normative and prescriptive. The permissive character and ambiguity of the RFP resulted in an only limited, albeit increasing reflection of RFP principles in regional and country strategies and contributed to projects that are not fully compliant with RFP requirements. Two other main shortcomings of the RFP lie in the absence of a costing for its implementation and a requirement to retrofit ongoing projects to meet RFP standards.

Progress towards implementing the RFP. In meeting the four challenges of the RFP¹ , IFAD-assisted projects performed moderately well across all dimensions. Partner Financial Institutions (PFI) sustainability was achieved in the case of 24 per cent of partner institutions – a low percentage, but comparable to that of some agencies that work in less challenging urban areas. The diversification of financial products and services and financial intermediaries showed positive, but modest results. Against the challenges of stakeholder participation and promoting conducive regulatory frameworks, little change in performance has been noted. IFAD’s rural finance assistance is meeting the RFP goal of serving rural poor (albeit not the poorest of the poor, which is in line with best practice) and by serving 60 per cent women.

Explaining improvements. Modest advances made by rural finance projects towards greater RFP conformity can be ascribed to a number of factors, which include (i) Decision Tools which set out frameworks of best practice; (ii) the Consultative Group to Assist the Poor (CGAP) donor peer reviews and subsequent rural finance action plans, which brought greater attention and focus to the strategies for improving rural finance operations; and (iii) IFAD’s increasing general knowledge of best practice in rural finance, supported by publications and efforts to improve capacity. The continuous trend in improving project design and progress made in resolving some project implementation issues provides a good platform from which IFAD can address a number of outstanding issues that will further improve the performance of its rural finance assistance.

Resources limitations account for the slowness of improvements. The modest positive trend was countered by significant factors that impeded more rapid performance improvements. These factors include insufficient resource allocations, in particular from the administrative budget, to ensure an adequate amount of technical in-house expertise in rural finance. IFAD is well below par in this area compared to other international agencies active in microfinance. Human resources, though improving, still fall short of what is needed in quantitative terms² to provide the necessary support to the sizable and complex IFAD rural finance portfolio. Moreover, while the CLE recognizes the collective effort to improve rural finance activities at IFAD, by concentrating the leadership for IFAD’s rural finance work into the responsibility of a single staff (i.e., rural finance technical expert in Technical Advisory Services division (PT)) the institution now faces significant key person risk. Moreover, support to rural finance activities is based on highly personalized relationships that now need to be institutionalized. Funding has also fallen short of requirements for the provision of Technical Assistance (TA), which is a key factor in the success of many microfinance projects.

Fundamental changes necessary for significant performance improvements. Finally, there are a number of barriers to the effectiveness of IFAD assistance for rural finance. These barriers stem from IFAD’s founding agreement and entail inter alia: mandatory lending to government rather than directly to PFIs, structure and staffing of project implementation units, as well as limited IFAD field presence and constraints on IFAD to provide direct supervision and implementation support. The forthcoming policy on supervision and implementation support is likely to change the limitations on IFAD in this respect, but whether these changes are sufficient to address the requirements of technically qualified rural finance expertise in the field remains to be seen. Unless these changes are made, IFAD’s rural finance assistance is at risk of continuing to perform below expectation and, more importantly, to endanger the meager financial resources of the rural poor, if unsustainable financial service providers are supported.

Recommendations agreed upon by IFAD

Based on the recommendations made in the CLE, IFAD Management agrees to take the following actions. Some of them are already reflected in IFAD’s rural finance action plan, the implementation of which will be actively pursued, as per the recommendation of the CLE.

• Action 1: decide to take a leadership role and define a strategy to get there. IFAD Management decides to make Rural Finance an area of excellence and define a strategy to do so, through the development of effective partnerships with rural finance centers of excellence, field practitioners and donors.  IFAD is committed to making the necessary investments to improve the RFP, in-house capacity, and instruments (as detailed below) to ensure the Fund lives up to its ambition.
  
• Action 2: clarify the RFP standards and supporting instruments. IFAD [PMD] will prepare an Update to the RFP, which will summarize its current policy prescriptions, clarify areas that are insufficiently prescriptive, and add more recent best practice standards. The Update will be a stand-alone document that will incorporate the major thrusts of the present RFP, for ease of reference, and will have a maximum of ten pages and clarify in particular financial sector analysis, participation, social performance, performance-based contracts for partner finance institutions, gender, and the environment. The Update will be presented for information to the Executive Board (EB) in an informal session during 2007. Revisions to the supporting instruments (such as the Decision Tools) will follow the adoption of the RFP Update and will entail an ongoing process to continuously capture advances in the sector.
  
• Action 3: IFAD Management does not agree with this recommendation³ because requiring the divisions to prepare a detailed regional strategy would not enhance the impact of IFAD’s work in rural finance, given that the challenges of rural finance are more closely linked to each national context, and not to the wider regional environment. In addition, Management concluded that a more effective way to improve the design and implementation of IFAD projects in the field would be to develop strategic partnerships with technical institutions and centres of excellence.
  
• Action 4: more systematic and earlier provision of technical expertise in the design process. PMD will also ensure that from mid 2007 onwards, all projects with a rural finance component have adequate continuous rural finance expertise available during the project identification and design process. This will be achieved through continuously improving IFAD’s in-house capacity (see Actions 5 and 6) and through regional partnerships for rural finance, which IFAD has started to form as part of the RF Action Plan. The development of technical partnerships with regional RF centers of excellence will therefore be pursued and expanded (in particular in Latin America and Asia, where they are still to be defined).
• Action 5: ensure that rural finance operations meet RFP standards. PMD will ensure that the standards of the RFP Update and supporting instruments are reflected and interpreted in country context, in all new RF formulation exercises. PMD will institute a rigorous check of each new project that includes rural finance (as a component or in stand-alone rural finance projects) to ensure projects meet RFP standards. This quality check will be undertaken by PMD and result in the Assistant President, PMD, requesting revision or redesign of projects that do not meet RFP standards. In addition, the new quality assurance mechanism being developed by IFAD will include measures to check on policy compliance and quality of rural finance components. Finally, the issues paper prepared for the OSC meetings will continue to cover compliance issues, but be updated to reflect new requirements of the RFP Update.  The results of these quality checks will be reported to the EB in the annual Portfolio Performance Report to inform the EB of the quality of new project proposals. This system will be developed in 2007.
• Action 6: build greater capacity. PMD commits itself to develop in 2007/2008 (and provide the required funding to do so) a short 2-3 days basic course on rural finance, as part of the Rural Finance Action Plan. This course will be offered on a regular basis (at least twice per year) and be a requirement for all staff designing or managing projects with rural finance components. It will include, among others, modules structured around the key messages of the RFP Update, RF Decision Tools, the MIX, how to optimize the use of IFAD funding instruments, innovative product design, key policy issues etc. The modules will be continuously updated and expanded to keep them in line with latest industry developments. Staff will be required to attend training and their participation in training will be acknowledged in their annual performance evaluation.
• Action 7: allocate commensurate resources to rural finance and reduce key person risk. IFAD commits to ensure that the position of the senior technical advisor for rural finance will be selected as soon as possible, preferably by April 2007 ⁴ and that all necessary steps will be taken to move the two current RF positions from temporary status to more stable contract types and funding sources, to ensure continuity of essential expertise (e.g. for monitoring the partnership with the MIX and maintaining essential thematic and regional partnerships). As a second step and in order to mobilize the means necessary to fully implement the actions recommended by the CLE and accepted in this agreement at completion point, PMD will deploy all necessary means to create two additional professional positions in 2007/2008 to provide the required in-house technical expertise. In parallel and as a potential alternative support mechanism, PMD will seek to replace departing staff with new staff with strong technical skills, including in rural finance, in order to enhance the technical capacity within regional divisions in this area.
• Action 8: mainstream the use of the MIX⁵ as a reporting platform for RF across IFAD. As part of IFAD’s RF Action Plan, PMD will ensure that the global partnership between IFAD and the MIX continues at least over the next three years, in order to mainstream the use of the MIX as the reporting platform throughout IFAD RF programs⁶. PMD will secure the required funding to that effect.
• Action 9: develop more relevant instruments, better delivery, and stronger supervision. To meet the more fundamental challenges that the CLE identified⁷, which may require amending IFAD’s founding agreements and therefore interaction with and guidance from member countries, IFAD Management will organize opportunities for interaction with its EB on best practice for rural finance and the implications that IFAD faces when aiming to meet them, as well as practical change processes required to (i) optimize the use of IFAD funding instruments, including for increased provision of technical assistance and (ii) improve project implementation mechanisms through testing alternative modalities to the standard “project management unit” approach. The EB may decide that amendments to IFAD’s founding agreements are needed to implement those changes. IFAD management is prepared to submit a relevant proposal to the EB and the Governing Council on this subject.⁸ Management is also ready to involve the EB in regular ad-hoc seminars on relevant issues in rural finance on the margin of scheduled sessions. Such EB seminars are included in the PMD departmental management plan.  
  
• Action 10: gain greater relevance through a more efficient and effective process. To shorten the project cycle (including from approval to effectiveness), IFAD will pilot, aspart of the implementation of its corporate Action Plan, a shortened project cycle that will also concern a selected number of rural finance project. The pilot will aim to reduce the total time from inception to start-up to less than 24 months and to reduce project design documentation to 50 pages in total. Details of the pilot process will be determined in 2007 and implemented over two years.

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1/ The four challenges are sustainability and outreach, financial sector diversification, policy and regulatory framework, and participation.

2/ The quality of the limited number of rural finance experts is high.

3/ Embed RFP Principles into the Work of Regional Divisions. As part of the commitment to become a leader in rural finance, each regional division of IFAD will (i) undertake or update sector analyses of regional challenges to rural finance, using the CGAP macro, meso, micro framework; (ii) determine priorities within each region and translate the principles of the RFP into meaningful objectives for each of the regions; and (iii) define a strategy for achieving the rural finance objectives for each region. The regional strategies will be used at the corporate level to position the Fund vis-à-vis other development partners, and inform the update of IFAD’s Rural Finance Action Plan, which provides the framework for building IFAD’s in-house and outsourced capacities.

4/ The current incumbent has taken up a position with UNCDF, starting February 2007.

5/ Microfinance Information eXchange: a web-based platform enabling MFIs to report on their outreach and overall performance. 

6/ The MIX captures, among other ratios, all the RIMS indicators set up by IFAD in the area of rural finance. 

7/ These challenges include working more directly with partner finance institutions; placing responsibilities for project management in institutions that are technically better qualified to supervise financial sector projects; and using larger amounts of loan money for the provision of technical assistance.

8/ The evaluation had originally recommended that IFAD establish an EB working group on rural finance. According to the evaluation, this working group could provide a platform to discuss with EB members best practice for rural finance and the implications that IFAD faces when aiming to meet them. However, while management recognizes the importance of interacting with the EB on key issues and challenges in rural finance, they recommended that IFAD avoid establishing additional working groups of the Board.