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Letter to management
Early in 2002, CGAP and DFID’s Secretary of State Clare Short launched
an initiative to improve aid effectiveness, using microfinance as a test
case. As a first step in this initiative, more than 20 bilateral and multilateral
development assistance agencies have volunteered to participate in a series
of Donor Peer Reviews. These Peer Reviews are not evaluations or detailed
portfolio reviews, but rather focus on each agency’s internal procedures,
processes, practices and systems to identify success factors and constraints
to good practices in microfinance.
The short but intensive reviews will result in concrete recommendations
for each agency and should lead to senior management commitment to specific
changes that improve the effectiveness of microfinance operations. It
is expected that the analysis and recommendations may also apply to other
areas of development assistance pursued by each agency.
A Peer Review team including Heather Clark, Director, Special Unit for
Microfinance of UNCDF/UNDP, Hege Gulli, Microfinance Advisor of NORAD,
and Douglas Pearce and Alexia Latortue, Microfinance Specialists at CGAP
visited IFAD in Rome from 17-21 June, 2002. The review team interviewed
over 35 people from the five regional divisions, the Technical Advisory
Division, Office of Evaluation and Studies, Finance and Administration
Department, and UNOPS. In addition, a field visit to Uganda was conducted
from 29 April-3 May 2002.
The Peer Review team’s findings for IFAD, contained in this letter
to management, will be combined with those from other agencies in a synthesis
report. The overall results and follow-up actionswas discussed in a meeting
hosted by Clare Short in Rabat, Morocco on 9 September, 2002. A final
meeting of Ministers and heads of agencies participating in the peer reviews
will be organized upon completion of all the reviews in 2003 to share
experiences and changes made as a result of the exercise.
This letter outlines IFAD’s strengths and challenges with respect
to applying good practices in microfinance. It then presents a number
of specific recommendations. Finally, a summary matrix presents the key
findings and recommendations according to six analytical areas.
Strengths
 IFAD
stands out among the development assistance community in its exclusive
commitment to rural poverty reduction. With 75 percent of the world’s
1.2 billion extremely poor people living in rural areas, the Fund has
an important contribution to make in helping to meet the Millennium Development
Goals (MDGs).
IFAD’s strategy for poverty reduction and broad-based growth, as
laid out in the Rural Poverty Report 2001,
hinges on increasing access to a variety of assets for the rural poor.
As the Strategic Framework for IFAD 2002-2006 notes, there is a strong complementarity among the variety of assets the
poor need: 1) human and social assets; 2) productive assets and technology;
and 3) financial assets and markets. IFAD’s approach is highly consistent
with the emerging vision of building financial systems for the poor, which
entails ensuring permanent access to a wide range of client-responsive
financial services including savings, credit, insurance, payments and
remittances for the rural and urban poor. Although not a panacea, evidence
shows that the poor use this broad range of financial services to make
their own decisions about investing in various types of assets, from education
for their children, productive assets of all types, and business opportunities.
Building on this deep commitment to rural poverty reduction, IFAD exhibits
the following strengths related to financial services for the poor:
- Staff demonstrate strong allegiance to IFAD’s mission of working
with the poor and the poorest in the most remote rural areas. This mission-driven
approach presents opportunities for deep outreach and innovation as
IFAD works in areas where others will not go and struggles to find solutions
to the multi-faceted problems facing its core target group.
- IFAD’s long history of specialization in rural poverty reduction,
with about 30 percent of the overall portfolio in rural financial services,
has resulted in a wealth of experience in both successful and less successful
approaches. Moreover, IFAD’s international staff possess deep
commitment to respecting country-level realities, expertise in rural
development and an intimate understanding of the project development
process.
- The existence of a Technical Advisory Division (PT) that does not
manage its own portfolio and is dedicated to supporting regional divisions
is an important source of in-house technical expertise. The rural finance
advisor (PT/RF)—though just one—has strong expertise.
- Though somewhat complex and not always exploited appropriately, the
project development cycle offers potential for program coherence in
IFAD’s country interventions, quality assurance early in the inception
and formulation stages, and teamwork across divisions. COSOPs can provide
a good framework for defining appropriate value-added interventions
for IFAD. The PDT, when used as envisioned, allows for the early input
of technical expertise and ideas from across the Fund.
- IFAD has the ability to introduce some flexibility in the choice of
instruments and the structure of loan agreements. The grant facilities,
for example the TAGs, provide CPMs a degree of leeway to seize opportunities
to directly support innovative initiatives that require small amounts
of funding. New creative ways to introduce performance-based criteria
and conditionality clauses in loan agreements present as-of-yet under-exploited
opportunities for increased influence and quality control.
Challenges and Creative Tensions
Notwithstanding the strengths outlined above, IFAD faces a number of
challenges and creative tensions to maximizing its effectiveness in ensuring
the permanent availability of financial services to the rural poor.
Challenges
- Implementation of strategic shift. IFAD appears to be in
a critical period of transition in how it supports rural finance. This
transition is due to both necessity (the failure of state-owned banks)
and IFAD’s interest in new approaches to serving the rural poor
with financial services. This strategic shift from supply-led agricultural
credit as an input toward demand-led rural financial services presents
fundamental challenges, as IFAD’s institutional culture, processes
and systems lag behind the shift. Although IFAD’s Policy on Rural
Finance provides a definition of rural finance, there is no clear common
understanding among staff of what rural finance, microfinance, and agricultural
finance is at IFAD and their interrelationships. Moreover, the new emphasis
on institution building and policy work is not currently matched by
changes in instruments and capacity.
- Considerable approval pressure. There is considerable approval
pressure. CPMs are stretched for time and often prioritize project preparation
for Board approval, sometimes to the detriment of technical coherence
in design, quality assurance, supervision and monitoring, and learning.
With just three approval cycles per year, it appears difficult to stop
projects or request serious modifications to project designs that might
ensue in delaying the presentation to the Board.
- Ad-hoc technical input in design phase. The effectiveness
of PT/RF’s contribution at the COSOP, PDT and TRC stages depends
in large part on whether CPMs actively seek PT/RF’s inputs early
on and whether rural finance is a sufficiently large project component
for the RF advisor to serve as lead advisor. Small rural finance components
may be “lost” amidst other project objectives and may be
less visible to PT/RF. This ad-hoc involvement of PT/RF in the early
design stages has a negative impact on rural finance programming quality,
especially since projects and budgets are usually well-defined during
formulation. Moreover, the timing of the mandatory TRC process often
creates an adversarial environment, where PT may be viewed as a hurdle
to clear rather than as a supportive technical partner.
- Reliance on small group of consultants. CPMs are mostly
generalists and country-specific experts without much sectoral expertise.
Many tend to rely on a small group of consultants, for the bulk of design
work, on the basis of long-term relationships, rather than seek out
new consultants with fresh technical ideas.
- Limited information on performance. Basic information on
the performance of financial intermediaries is lacking. Cooperating
agencies produce volumes of information that is activity or input/output-based
rather than performance-based. This monitoring approach presents risks.
The timely tracking of financial, efficiency and outreach indicators
is vital to get early warning signals about financial intermediaries’
health and the satisfaction of clients before it is too late and the
institutions fail.
- Appropriateness of main instrument. As is the case with
other multilateral development agencies, IFAD’s main instrument—loans
to governments—presents challenges. IFAD’s new demand-led
approach and support for the development of financial markets and services
requires high levels of specialization and does not lend itself to direct
participation by most types of government agencies.
- Implementation of the Rural Finance policy. The Rural Finance
policy is not yet consistently recognized and applied throughout IFAD.
The Decision Tools (DTs) have been recently finalized to operationalize
the broad objectives of the policy. The challenge will be to ensure
that the DTs are reflected in the reality of IFAD operations in the
field.
- Insufficient learning. Although some informal networks exist,
there is limited systematic cross-fertilization of ideas within and
among regional divisions. This limited exchange of ideas inhibits institutional
learning in a field—rural finance—that requires innovations
to meet the dual objectives of depth of outreach and sustainability.
In addition, new project designs do not benefit as much as they could
from lessons due to weak feedback loops between the field and Rome.
The outsourced supervision to cooperating agencies results in much of
the ground-level knowledge staying with implementing partners and consultants.
- Unclear incentives. The Peer Review team could not detect
any incentive—positive or negative—for IFAD staff to manage
a portfolio of quality investments. While staff seem personally motivated
to do well, the present system seems to neither reward good work nor
sanction poor performance. The apparent lack of incentives is reinforced
by a performance evaluation system that some IFAD staff interviewed
describe as perfunctory. This institutional culture, coupled with a
relatively flat organizational structure that does not provide many
career advancement opportunities, may de-motivate hard working staff.
Creative Tensions
In addition to the challenges noted above, the review team observed
some creative tensions that present opportunities, but may also dissipate
effectiveness if not addressed.
- Regional Specificity vs. Common Minimum Standards.
The premium placed on respect for the specificity of country and regional
contexts is sometimes used as a justification for not accepting policy
guidance and basic standards of sound financial intermediation that
hold true regardless of geography or methodology.
- Focus on Impact vs. Implementation Support. The
Board’s signal to focus on impact does not explicitly address
IFAD’s unclear mandate in regards to implementation support. To
ensure impact, getting, analyzing and using information effectively
during project implementation must be a priority. Knowledge of financial
intermediaries’ performance is a pre-requisite for acquiring meaningful
impact data at the client level.
- Policy Role vs. Field Presence. Effective policy
work requires good knowledge of local stakeholders, experience and accompanying
technical skills in upstream work, and continual engagement at high
levels. IFAD’s move towards upstream policy work raises questions
of comparative advantage, given its lack of local presence.
- Innovation Focus vs. Instruments. IFAD focuses on
innovation, yet its main instrument is not best suited to support this.
Convincing governments to take loans for institution-building and including
small pilot projects in large credit lines is difficult. This challenge
is especially accentuated in the case of non-concessional loans.
Recommendations
The Donor Peer Review team has specific recommendations for IFAD that
build on the on-going internal reflection and reform initiatives: the
1996 work of the Project Cycle Re-engineering Working Group; the Rural
Finance Policy; the Divisional Plan: the Technical Advisory Division (PT)
2002 and Beyond; the Strategic Framework for IFAD 2002-2006; Operationalizing
the Strategic Framework of the PD Retreat 2002; and the draft Decision
Tools.
The recommendations are offered in the spirit of strengthening the process
to fully implement the strategic shift that IFAD has already begun:
| Credit as an Input |
|
Financial Services for the Rural Poor |
| Agricultural and state-owned banks |
—> |
Pro-poor rural financial institutions |
| Supply-led agricultural credit |
—> |
Demand-led rural financial services |
| Large, multi-sector projects |
—> |
Discrete sizeable rural finance components or 100% stand alone
projects |
| Emphasis on design and loan agreement |
—> |
Better understanding and monitoring of rural financial institutions
and implementing partners |
| One-off credit, time bound to length of Project |
—> |
On-going relationship with financial intermediaries to build permanent
capacity through grants and loans |
| Subsidized interest rates, depleting capital |
—> |
Cost-recovery/commercial interest rates, revolving capital |
| Delivery managed through project management units (public) |
—> |
Delivery managed by specialized financial intermediaries (private) |
| Generalists, technical know-how not incorporated in design |
—> |
Specialist, technical input early on in concept and design stages |
| Accountability for activities: size of target group and number of
loans |
—> |
Accountability for performance: clear indicators on efficiency,
financial viability and outreach |
Specific recommendations, grouped in four categories, for IFAD to build
on its strengths and improve its effectiveness in supporting rural financial
services for the poor are offered below.
1) IFAD should achieve an agency-wide vision for its new approach to
rural finance and determine how to operationalize its strategic shift,
building on its comparative advantage. Specific operational recommendations
include:
- Develop common vocabulary and vision statement. IFAD should commission
PT/RF to draft a concise Vision Statement that defines the strategic
shift for the agency as a whole and identifies what IFAD will and will
not support. The Vision Statement should draw from the Rural Finance
policy and DTs to develop operational definitions for what microfinance,
rural finance, rural microfinance, and agricultural finance mean internally.
- Demonstrate leadership’s commitment to the shift. Top management
should clearly signal its support for the Vision Statement once consensus
is achieved and it is finalized. This signal should come from the highest
possible level.
- Ensure the understanding and application of the DTs. IFAD should
hold in-house trainings and consultations on the content and implications
of the DTs. These meetings could occur over a period of time and focus
on discrete parts of the DTs.
- Focus on comparative advantage in policy work. Donor agencies can
work on policy issues at several levels: macro policy, legislation,
regulatory framework, and norms and practices. Given its size, staff
expertise, and lack of field presence, IFAD should primarily engage
in developing norms, practices and showcases of what can work in rural
finance. IFAD could leverage its grant funds and relationships with
other donors to fund innovative rural finance pilots that would be of
interest to policy makers.
2) While respecting the time constraints of CPMs and the institutional
focus on design, IFAD should institute mechanisms to manage for results.
Some specific operational recommendations include:
- Develop questions for rural finance components and projects.
Use the DTs and CGAP’s 12 Questions to establish a list of basic
questions that all CPMs, regional division heads, PT advisors, and others
should ask of projects with credit/finance components, however small
they might be. This up-front filter could help ensure the early involvement
of PT/RF and uncover major design flaws. The questions could also be
adapted for the Board.
- Undertake portfolio reviews. Efforts to improve performance
and results should be based on knowledge of the existing portfolio.
IFAD should conduct regular rural finance portfolio reviews by region,
preferably with external expertise, to understand the portfolio’s
health. PT/RF should help recruit the external consultants and facilitate
the internal follow-up. The reviews should be shared widely through
enlarged thematic group meetings and workshops.
- Establish 3-4 key reporting indicators. PT/RF should facilitate
a consultative process across regions and draw from the DTs to establish
simple, “less is more” reporting for rural finance components
and projects. This revised reporting could be based on 3-4 key indicators
to enable effective and focused monitoring. These indicators could be
introduced in phased manner (for example, one region at a time) and
included on the first page of all reports. APOs or interns could help
identify the rural finance portfolio and determine the ease or difficulty
of getting meaningful information from operations. Transparency can
have a high cost if the information produced and available for the first
time is not positive. For this reason, the introduction of these reporting
indicators should be accompanied by clear incentives from management
that reward transparent reporting and improvements in trends in performance,
not absolute starting points. The success of piloting this type of simple
reporting will hinge, in large part, on CPMs being told and believing
that they have more to lose by failing to produce information than by
presenting poor information. Management should be prepared to help find
corrective measures for improving performance in the future, rather
than dwell on past performance.
- Improve partner selection and monitoring. Tools for partner
appraisal and selection should be developed from the DTs. The relationship
with cooperating agencies should be managed more proactively with clear,
explicit expectations for minimum performance-based reporting. CPMs
should more actively monitor partner agencies using agreed upon performance
criteria, and should be prepared to cut or halt contracts if milestones
are not reached.
- Support rural finance as a discrete project whenever possible.
Rural finance should no longer be a minority component of multi-sector
projects, in order to help ensure specialized technical attention at
all project cycle stages. IFAD should accelerate its move toward supporting
rural finance only as a discrete project, or as a majority component
when necessary.
- Create a separate budget category for rural finance components.
IFAD should encourage CPMs to use the Flexible Lending Mechanism or
otherwise introduce the flexibility to set up separate budget categories
for the rural finance components of projects. This budget line allows
for flexibility in budget design (to match institutional capacity needs
as they develop during the project) and the ability to end the rural
finance component if performance targets are not met.
- Explore increasing the percentage allocation of grant funds.
Increasing the percentage of grant funding in the overall IFAD budget
would provide more flexibility to CPMs. If not possible, make the limited
grant funding available only to projects that follow good practice.
Sequence grant funding where possible with lending (capacity-building
then capital).
3) IFAD should look for ways to enhance technical capacity internally
and across all partners that work on IFAD-supported projects. IFAD should
also strengthen the proactive role of the rural finance advisor in PT.
Some specific operational recommendations include:
- Offer in-house orientations for Rome-based staff. PT/RF
should develop and periodically organize short orientations on the latest
thinking and practices in rural finance for CPMs, division heads and
Board members. The training could be offered on two tracks—basic
and advanced—and much of the material could be drawn from the
DTs.
- Facilitate access to technical workshops. IFAD should invest
in more in-depth technical training for CPMs that manage significant
rural finance portfolios. Many international
courses exist for this purpose (e.g. Boulder, Bankakademie, New Hampshire).
- Establish a grant facility for training field-based human resources.
IFAD should create a global grant facility for capacity building of
PMU staff, implementing partners and cooperating agencies. Priority
should be given to existing partners, although IFAD could also invite
other potential partners for the future. Training modules could be developed
from the DTs and materials from CGAP’s regional capacity-building
hubs.
- Retain a core group of roving consultants for increased technical
support to the field. IFAD should consider recruiting a group of
very strong consultants, each assigned to a region to provide trouble
shooting services, and implementation and monitoring support. They could
be hired on a retainer fee basis.
- Build a roster of qualified consultants. IFAD should more
systematically encourage the use of the good performing consultants
already in its network and expand the use of new consultants, tapping
into public databases to identify the best expertise available. PT/RF
could also consult with CPMs and external agencies to develop and maintain
a consultant roster.
- Strengthen the proactive, mainstreaming role of PT/RF across
regions. PT/RF should pro-actively market its informal, helpdesk
function outside the project development cycle to all regions. PT/RF
should also help regional divisions develop strategies for obtaining
better information on performance in a time-and cost-effective manner.
PT/RF could then help CPMs analyze the information, and develop action
plans in problem cases.
4) IFAD should establish mechanisms to facilitate learning within and
across regions, between the field and Rome, and with external partners
and other donors. Some specific operational recommendations include:
- Continue to leverage relationships with others. IFAD can
contribute to the global learning agenda on rural finance and work with
other donors to develop good practices for rural finance.
- Write internal success case studies. IFAD should identify
and write-up internal successful models and projects, distribute them
widely, and hold short “lessons learned” workshops.
- Take greater advantage of the Rural Finance thematic group.
The thematic group can de-facto serve as an extension of PT/RF in the
regional divisions for the purposes of knowledge acquisition and dissemination.
- Develop an interactive website. Following the model of Human
Health and Nutrition, PT/RF should consider creating an interactive
rural finance website to facilitate technical information exchange between
HQ and the field. The website should include indexed operational information
(including the DTs), and could be linked to other sites such as CGAP’s
forthcoming Donor Information Resource Centre (DIRC).
- Establish a small, grant-based flexible fund to support innovations.
IFAD should support low-cost initiatives that push the frontier of developing
financial services for the rural poor. All such pilots should include
funds for the learning agenda, to capture, analyze and disseminate lessons
learned. A positive step in this direction is the IFAD-CGAP Rural Pro-Poor
Innovation Challenge.
Aid effectiveness and microfinance matrix - International Fund for Agricultural Development (IFAD)
| 1. Strategic Clarity and Organizational Culture |
Focus and commitment to rural poverty reduction
Staff demonstrate mission-driven approach to work
Confusion over what rural finance, microfinance, rural microfinance
is at IFAD, and how agricultural finance fits into the picture
Strategic shift in how rural finance is supported has begun, but
not yet matched by corresponding shift in institutional culture,
processes and systems
Rural Finance policy is not yet reflected in operations
Deep respect for regional specificity results in lack of appetite
for policy level guidance and standard performance indicators
|
Craft Vision Statement that defines how financial
assets and markets work for the poor
Affirm commitment to the Vision Statement at the highest possible
level
Develop operational definitions for what microfinance, rural finance,
rural microfinance and agricultural finance are at IFAD
Ensure the understanding and application of the DTs through in-house
training and consultations
Determine comparative advantage for policy work and focus on the
appropriate level (i.e. norms and practices)
|
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| 2. Technical Expertise & Resources |
Expertise of technical staff is high, but with
just one person the demand exceeds supply
Influential CPMs are mostly generalists and country specific experts
without sectoral expertise
Over-reliance on a small group of consultants identified through
an unclear selection process and offering uneven levels of quality
|
Offer two tracks—basic and advanced—of
orientation and training to CPMs, division heads and Board members
Send CPMs who manage significant RF portfolios to external, in-depth,
technical training
Build roster of qualified consultants, identifying good performers
already in the IFAD network as well as new sources of expertise
Establish grant for capacity-building of field-based human resources
|
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| 3. Organizational Structure and Flows |
PT is a purely advisory division to support regions
Ad-hoc technical input in design phase
No field presence
Flat organizational structure with few career advancement opportunities
Limited cross-fertilization within and among regional divisions
inhibits learning
Weak feedback loops from field to Rome result in insufficient
learning and loss of knowledge of ground-level innovations
|
Strengthen proactive mainstreaming role of PT/RF
Write internal case studies on successful models and projects,
and disseminate widely
Use the Rural Finance thematic group actively for knowledge acquisition
and dissemination
Develop an interactive website, following the model of PT/Human
Health and Nutrition
Establish small, grant-based flexible fund to support innovations
|
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| 4. Instruments and Incentives |
Main instrument—credit lines to government—presents
challenges to demand-led approach to developing financial markets
and services
Grant facilities (e.g.TAGs) provides some flexibility to directly
support innovative initiatives
Flexible lending mechanism offer the flexibility to introduce
performance-based criteria and conditionality clauses in loan agreements
Considerable approval pressure
Unclear incentives for quality—no reward for good work,
no sanction for poor performance
|
Explore increasing the percentage of grant funding
in the overall IFAD budget and/or limiting grant funds for use by
good practice projects
Establish a small, grants-based fund to support innovations (e.g.
IFAD-CGAP Rural Pro-Poor Innovation Challenge)
Encourage the more widespread use of the flexible lending mechanism
and conditionality clauses in loan agreements to introduce performance-based
criteria
|
| |
| 5. Project Cycle |
Project development cycle, though complex and not
always exploited, offers potential for technical inputs and quality
assurance
Rural finance may be “lost” amongst other project
objectives if a component of larger, multi-sector projects
Mandatory TRC technical review often creates an adversarial relationship
between PT/RF and PMD
Unclear mandate and time for implementation support; little capacity
building for implementing partners and influence over cooperating
agencies
Limited information on performance of financial intermediaries
Cooperating agencies provide activity-based rather than performance-based
monitoring information
|
PT/RF should offer its informal, helpdesk services
outside project development cycle
Support rural finance as a discrete project whenever possible
Set-up separate budget category for rural finance components of
projects
Develop and publish basic questions to ask of all projects with
finance components
Improve partner selection and monitoring
Undertake regular regional portfolio reviews
Retain a core group of roving consultants for increased technical
support to the field
Establish 3-4 simple “less is more” reporting indicators
for all RF projects
|
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| 6. Future Microfinance Operations |
|
Document and replicate innovations more systematically
within IFAD & contribute to global learning agenda on rural
finance good practices
Increase co-financing and cooperation with other donors |
|
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