Part II: Design and implementation considerations

Part I analysed a number of important cross-cutting issue. However, IFAD faces the challenge of reflecting principles and recommendations in the reality of its project cycle and operations. Part II provides a broad analytical framework to that end, starting with the identification and formulation stage of projects and programmes, and continuing with their implementation.

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9. Identification and formulation of rural finance programmes

9.1 Introduction

In this section, the various stages of identifying, formulating, implementing, operating and monitoring a rural microfinance programme are identified, and the various management procedures for each stage are discussed. Additionally, certain key ratios and performance guidelines are highlighted to enable the reader to track the ongoing performance of a programme.

However, the fundamental element in establishing a successful rural finance programme is achieving broad agreement on the objectives and goals of the programme, and ensuring that the strategy adopted – model chosen, services chosen, partner(s) and institutional structure – is relevant, and appropriate for the needs of the target population and the local socio-economic environment.

9.2 Major Stages in Programme Elaboration

9.2.1 Understanding the context

Understanding the context is an indispensable prerequisite, with several elements to take into consideration at the stage of preparing the country strategic opportunities paper.

The first task is to assess whether or not IFAD should support a rural finance intervention. There are few absolute conditions that will justify not intervening in rural finance. The negative indicators are generally agreed to be very high inflation; major physical security problems; a pattern of constantly changing and very low population density; a local economy that is mostly based on barter, with little monetization; and a very poor credit culture.

Beyond these initial criteria, it is important to study the context of the planned intervention. This will help identify elements that could support or hinder the growth of RFIs at country level, as well as helping IFAD orient its choices in terms of sites, partners, approaches and methodologies to be adopted.

At this stage, the objective should be to focus on the basic factors that might affect the development of rural finance, and to identify issues that could constrain RFI viability and institutionalization. An indicative list of factors is given in Table 6. These factors should be analysed on a broad basis, without overly detailed analysis. Nevertheless, enough time and resources should be allocated to ensure reasonable certainty when identifying potential rural finance partners for IFAD in the programme area or in the country.

Table 6. Indicative list of issues to be considered when assessing potential viability of a rural finance intervention

1. General information on the country and zone: climatic constraints safety in the specific zone, as it might differ considerably from the rest of the country population density infrastructure, especially accessibility and communications presence of other development projects, including their modus operandi and possible conflicts

2. Economic conditions: macroeconomic stability general orientation of national policies, especially concerning poverty alleviation, agriculture, etc. inflation and exchange rates monetization of the local economy major income generating activities

3. Legal context: appropriateness of the legal and regulatory framework for MFI activities interest rate caps or other restrictive conditions

4. Social analysis: existence of an informal finance sector level of social structuring (villages, for example) heterogeneity in ethnic groups or languages level of political interference in credit decisions

5. Current supply of financial services, and analysis of the national finance sector, such as public vs private, and formal vs semi-formal vs informal services, both in the country in general and in the potential zone of intervention in particular

9.2.2 Clarify objectives and expected results: elements to take into account in programme formulation

It is necessary to define clear principles and broad objectives for the project, based on the analysis of the local operating environment and IFAD’s goals. The following issues might be relevant in this formulation process:

• Scale of intervention. Is this a national intervention or a more focused operation, or a combination? Before considering a national intervention, such as helping define a national strategy in support of microfinance or rural finance, IFAD should first assess what the impact of such a programme is likely to be, and whether it has a comparative advantage to embark upon it, compared with other donors who might have a stronger field presence. Historically, one should admit that the major success stories in microfinance and rural finance were not attributable to the existence of national strategies, but rather to the vision and efforts of industry leaders who proved that it was possible to provide – on a massive scale and in a sustainable manner – financial services to the poor. In many instances, innovative field interventions may have greater impact in expanding access to financial services by the poor. They may also provide a very useful contribution to policy dialogue at the national level, highlighting promising rural finance models and underlining the enabling conditions that should be established by governments to encourage RFI growth. In that context, the criteria for assessing under what circumstances and in what manner IFAD may want to consider a programme on a national-scale – as opposed to a more focused rural finance operation – were described in Section 7, on Policy Issues.
• Global strategy. If IFAD chooses a more operational approach, i.e. support to an RFI, what will be the broad programme objectives in terms of overall strategy, the possible zone of future intervention, the general outreach and client base envisaged by the programme, and potential future rural finance partners? It may be desirable, at the formulation stage, to focus on providing general principles and orientation. For example, the programme may define an open target population, while stating IFAD’s interest in helping the RFI to further extend the frontier of its intervention into remote rural areas. IFAD will more likely attain the twin objectives of outreach and sustainability if adequate flexibility is maintained at the formulation stage. For example, such flexibility could permit a RFI to further consolidate its operations in peri-urban areas, before expanding into rural areas. A major benefit of this type of flexibility will be the stronger accountability of the rural finance partner in implementing its strategy, thereby providing IFAD and the government with the possibility of negotiating with them to establish minimum, accountable performance standards (see below).
• Institutionalization and sustainability of the RFIs or networks to be supported. In line with the recommendation contained in the “IFAD Rural Finance Policy”, it is important that the principle of institutionalization be clearly stated and agreed at the formulation stage, together with a plan for achieving financial sustainability by the RFI. Institutionalization may take many different shapes and forms, and need not be specified at this stage. However, the principle of institutionalization should be stated clearly at the formulation stage, in terms of the capacity of the RFI to continue expanding operations after programme closure, with clear governance and management structures.
• Selection of an appropriate model. In rural finance, the specific operating conditions, even within the same country, makes it tricky to try to replicate a specific model. The success of an RFI will depend primarily on using a methodology that is appropriate to a specific clientele in a specific context. Such methodology would almost certainly need to be adapted before being applied to another social, economic or cultural setting.

9.2.3 How far should IFAD go in designing a rural finance programme?

The issue of to what extent conditions can, or even should, be imposed when designing a rural finance programme is crucial for any microfinance donor. The situation varies considerably, depending on (i) whether donors fund their interventions through grants or loans, (ii) the type of relationship with government partners, (iii) the programme implementation modalities specific to that particular donor, and (iv) the overall goals and strategy of the donor itself.

In the case of IFAD, the following considerations should be taken into account:

• Programme formulation documents usually cover several types of interventions, in which rural finance is only one of the components. In the case of programmes focused on rural finance alone, there is usually a large range of possible interventions, running the gamut from operational to policy, with provision made for the possibility of supporting a variety of rural finance partners or activities.
• Specific rural finance partners may be referred to in the formulation report, but direct negotiations on actual support and funding will usually not be finalized at formulation stage. This would take place in the context of subsidiary loan agreements, after the programme has been approved and IFAD loan negotiations finalized.
• Under the above conditions, it is difficult to envisage a detailed description at formulation stage of the precise scope of support to be provided at the level of individual RFIs. The formulation report should, however, describe the programme context, analyse its rationale and objectives, and also the various programme components, with related budgets.
• This absence of a detailed design offers both opportunities and challenges. In principle, it provides the opportunity to maintain a certain flexibility in the future selection of rural finance partners, and in the type of support that the programme can provide (capacity building, technical assistance, etc.). It also implies two challenges: first, to assess, at formulation and appraisal stages, the capacity of the potential rural finance partners to work with the programme, and their interest; and, second, to ensure that the broad budget categories in the programme document reflect the actual needs of those institutions (see below).
• The budgets attached to formulation reports are quite detailed and describe planned expenses by standardized categories, both investment costs (equipment, technical assistance, training and credit), and recurrent costs (salaries, operations and maintenance). This means that three topics need to be addressed: (i) the formulation mission needs to define budget expenditures before the final selection and negotiations with partner RFIs have been held; (ii) the RFIs may face a great variety of needs that are not necessarily foreseen in the standard budget expenditure categories; and (iii) the needs of RFIs may evolve during programme implementation. The challenge is how to ensure flexibility in reallocating funds to where they are most needed through budget revisions, such as increasing capacity building while diminishing a credit line. The following examples illustrate how the above challenges may be reflected in practical terms.
  • For a donor, it is particularly effective to support a rural finance partner on the basis of the RFI’s own long-term strategy and business plan. This is true for both existing RFIs and for a new network being set up by an operator. Negotiating donor support on the this basis has two advantages: first, it strengthens ‘ownership’ of the programme by the rural finance partner, as funding is based on their vision and not on the donor’s views and design, and, second, it enables the donor to negotiate clear conditions for continued support, such as minimum performance standards on the part of the rural finance partner. If such negotiation cannot be undertaken before programme approval, the formulation and appraisal reports should at least clearly highlight the process through which the selection and negotiations with future rural finance partners will take place during programme inception.
  • For a “young” RFI, donor funding is needed to cover part of its operating costs. An effective way for a donor to support such an institution is to provide funding – on a decreasing basis – to cover its operating income shortfall until the institution breaks even, based on its income and expense projections. A critical question, though, is whether there is sufficient flexibility to do so within the present budget categories.
  • Access by a RFI to loan capital should be conditioned on a number of criteria, including impact on savings mobilization if the RFI mobilizes deposits, absorption capacity, and ability to maintain high portfolio quality. Similarly, the same RFI may need more intensive technical assistance support at certain stages, such as to improve the MIS, for specialized training, or to pilot testing of new products. Since these developments are impossible to predict, the balance between budget categories is likely to change – sometimes even drastically – during the course of programme implementation.

9.2.4 Conclusion

At formulation or appraisal stage, for programmes in which rural finance is only one of several components, or for programmes that intend to support a range of RFIs, it may not possible to provide a final list of rural finance partners, although a list of potential rural finance partners might be available, who may have been approached for fact finding and expression of potential interest in the programme. Nor may it be possible to provide detailed funding proposals based on those RFI’s strategies and business plans. The formulation and appraisal report should, however:

• outline the selection process, and highlight the conditions and criteria that will be used to choose rural finance partners at programme inception. This could be done, for example, on the basis of a request for proposals, under the conditions described earlier;
• provide a list of potential rural finance partners (national, regional or internationally based) that have expressed interest in principle in working with IFAD in the context of the programme; and
• make provision for maintaining a certain flexibility in budget allocation, to best meet the needs of rural finance partners as circumstances evolve.

In contrast, for programmes that identify one major RFI as a sole programme partner, it should be possible to have the said institution produce – in close partnership with the donor, and before programme approval – a strategic development plan with precise commitments and performance standards.

9.2.5 Choosing the appropriate partners

9.2.5.1 Criteria for the identification of potential partners

Whoever the potential rural finance partner may be, its assessment by both IFAD and the government should be anchored in the threefold standards of: its competency and capacity; its sustainability; and its client outreach perspective. Therefore, elements to be analysed in the assessment include:

• the RFI’s vision – does it match the programme’s objectives from the point of view of outreach and sustainability?
• the target client base and the suitability of the services offered;
• the financial services offered and the results obtained (for existing RFIs);
• the potential partner’s specialization (or lack thereof). In the case of several activities, the degree of autonomy of rural finance operations vis-à-vis the other activities undertaken;
• the RFI’s competency – has it been demonstrated locally or elsewhere? and
• the operational and financial sustainability of the partner.

For existing financial institutions (RFIs or banks), it will be necessary for IFAD to conduct an institutional assessment beforehand, so as to obtain a clear understanding of their strengths and weaknesses, both financially and institutionally. Factors to be assessed will include:

• vision and strategic objectives;
• client outreach – the RFI’s clientele and the depth of its poverty outreach;
• institutional factors – legal status, background, capital structure and governance, management, human resources, organizational structure;
• systems – MIS, internal control and audit system;
• services offered, the clientele they reach, and the state of the market; and
• financial results – income statement and balance sheet, profitability, efficiency, loan portfolio analysis, analysis of the interest rates and the cost of funds, and liquidity and equity management.

CGAP’s Format for Appraisal of Microfinance Institutions is a particularly useful tool when conducting this type of institutional appraisal. It can be used as a standard instrument, prior to the selection of a potential rural finance partner. Moreover, it can be complemented by CGAP’s Poverty Assessment Tool (see: www.cgap.org), which has been designed to help donors evaluate the depth of poverty outreach of MFIs by comparing the relative poverty of their client base with regional and national situations.

Two situations may arise, however, during the identification of potential rural finance partners: What should one do if the potential partner in the area seems weak? and What if there are no partners in the area?

9.2.5.2 What should one do if the potential partner in the area seems weak?

Relying on existing RFIs is not always the best solution. Experience has shown that reforming an existing weak RFI is likely to be more risky, time consuming and costly than supporting start-up operations with a strong rural finance partner from outside the programme area.

However, if it is decided to undertake an intervention with a partner that has a number of weaknesses, it is essential that these are accurately analysed, and that a plan of support be negotiated with them, such as through a medium-term framework contract with an experienced operator. If the weakness reflects poor management and lack of leadership or commitment, IFAD should not support such a partner. If, however, the weakness lies with poor systems and internal capacity, although there is a management committed to change, the scope for successful reform may be much greater. In such case, it will be important to monitor and test the partnership by planning clear assessment and validation stages during programme implementation.

9.2.5.3 What if there are no partners in the area?

In the absence of suitable partners in the area, the first option should be to reconsider the planned intervention, or provide flexibility to allow formulation of a rural finance programme in another rural area. It might also be possible to call on potential partners on a national or subregional level to undertake the programme, such as MFIs or banks that wish to expand their operations into that particular area, or NGOs present in nearby areas.

9.2.6 Entrusting the selected partner to present its own strategic plan

Once the rural finance partner has been selected through a competitive bidding process, such as through a request for proposal operation (see Section 6.3), it is possible to further refine with them the strategic plan or business plan, and identify those areas where donor support will be most needed. This could pave the way for a dialogue between the programme staff and the RFI, to validate the proposal and ensure its coherence with the programme’s overall objectives and priorities. The framework of analysis described in Section 5 could apply in this case.

The following points should be assessed for adequacy before supporting a specific RFI with funding:

• adequacy of the proposal in relation to the broad programme objectives, namely poverty outreach and rural focus;
• quality of the planning for financial self-sufficiency, and the expected time frame;
• likely prospects of institutionalization in due course;
• recognition of potential governance issues and ways to address them; and
• identification of risks, and the quality of the plan to manage them.

9.2.7 Reaching a contractual agreement with the rural finance institution partner

As noted earlier, an effective way to increase the RFI’s or operator’s accountability for results and impact is through a contractual relationship. This provides the partner with a large degree of autonomy in the choice of approach and methodology, while ensuring that the proposal is in line with IFAD’s overall objectives and priorities, as defined in the programme document.

Moreover, the monitoring of simple RFI or operator performance indicators, based on the RFI’s own strategy, has several advantages, as it simplifies performance monitoring; gives a snapshot of overall RFI operation; and makes it possible to detect warning signs at an early stage, matters are deteriorating. It also strengthens the RFI’s accountability in relation to achievements.

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10. Implementation

Programme monitoring during the implementation phase is both an important responsibility and a challenge for IFAD.

• The quality of implementation determines the success of the programme – the greatest success stories in microfinance were attributable primarily to the quality of work during programme implementation, rather than the sophistication of programme design. Poor implementation will not save a well designed rural finance progrmme, whereas the contrary may be true.
• IFAD staff time and resources available for monitoring project implementation are scarce. Cooperating institutions and programme management units (PMUs) have a critical role to play during this phase. In this context, it seems that one key challenge is to explore ways and means of helping enhance programme monitoring, while not adding to the workload of IFAD country portfolio managers (CPMs) during this phase.

Monitoring impact has been an important priority for IFAD. Recent developments in approaches and tools in that sector were described Section 8. This section analyses from two aspects the challenge of strengthening monitoring of rural finance programmes.

• Which data should receive priority monitoring in rural finance programmes, with the object of increasing monitoring impact and effectiveness?
• What are the operational implications for IFAD? What practical steps might be considered for strengthening the Fund’s capacity to monitor the implementation of its rural finance programmes?

10.1 What Should Receive Priority Monitoring during the Implementation of Rural Finance Programmes?

The initiatives and activities that require monitoring obviously depend on the type of rural finance programme, i.e. whether they reflect IFAD support to a national microfinance strategy; a combination of policy and operational work; or a targeted intervention in support of one or several RFIs. The quality of policy work reflects a combination of factors, including the profile and competence of the PMU and the staff of the cooperating institution; the ability to identify and recruit high level expertise at certain stages to support critical programme interventions, such as for MFI regulation and supervision; and maintaining active channels of communication with other donors in the field, to ensure the coherence of donor support.

For the purpose of the Decision Tools, the present section will focus primarily on the monitoring of RFI operations, for three reasons: (i) monitoring is in essence technical, so less related to the monitoring of programme activities and more related to issues such as growth, performance, outreach, sustainability and institutionalization; (ii) monitoring is linked to the challenge of improving the quality and reliability of some basic quantitative information provided by RFIs; and (iii) monitoring is the area where some of the tools presented below could be internalized within IFAD and its government partners, such as through the setting up of a simple data base.

10.1.1 Preparing for a successful transition from programme mode to institutionalization of rural finance interventions

The transition from programme mode to the process of institutionalization is an issue that should not be left until the last phase of the programme. When IFAD supports rural finance initiatives that are not yet institutionalized, such as development of new networks, careful attention should be given during the entire implementation phase to the conditions that will enable a successful programme exit strategy and institutionalization of the rural finance partner. Although the specific monitoring elements will vary according to the model envisioned – board composition for a financial NGO; the relationship between elected managers and professional staff in CU networks; etc. – it is possible to identify two fundamental components that require careful monitoring throughout programme implementation. The first fundamental component, and the one most frequently emphasized, is financial viability, to ensure that the RFI will be able to cover its costs through its income. This may be assessed through the two ratios of operational and financial self-sufficiency (discussed below). The second fundamental component is institutional viability, which relates to the quality and effectiveness of the RFI’s internal operating structure and the quality of its governance.

The efficiency of the internal operating structure revolves around the management’s ability to coordinate the various components that are the functional form of the institution itself. These components include human resources, business planning, technical capabilities, and operating systems.

The quality of governance relates to the quality and intensity of oversight and guidance that the Board of Directors brings to the RFI. The factors that are important here are the composition of the board members, their levels of professional competence, and their depth of interest in the RFI itself. Their ability to define the mission of the institution, monitor and control the performance of the management, represent fairly the interests of the all stakeholders, and be able to act decisively in times of crisis will have a direct impact on the viability of the RFI.

Supervising a rural finance programme from the above perspective makes it possible to go beyond monitoring based on activities and expenses alone, and although the latter may be necessary for fiduciary reasons, often it provides little information about the programme’s potential for success or failure. Good quality governance facilitates monitoring based on outreach, performance and institutional capacity, and therefore helps capture, on an ongoing basis, the evolving dynamics of the RFIs funded by the programme.

10.1.2 Monitoring the effectiveness and impact of rural finance institution operations

Effectiveness and impact monitoring should be based on the RFI’s own projections and targets. It may also compare achievements with the minimum performance targets jointly agreed at programme inception between the RFI and the donor. Several parameters could be monitored, related to the three dimensions of outreach, impact and sustainability.

(i) The institutions’ penetration rate and extent of poverty outreach can be monitored using several indicators.

• Client dropout and retention rates make it possible to estimate the probability that a borrower will request a new loan once the previous one has been fully repaid (discussed in CGAP’s Format for Appraisal of Microfinance Institutions – see www.cgap.org). These rates also make it possible to assess the cost of borrower dropouts, and the impact on the RFI’s income due to high renewal rates. Moreover, it should encourage the RFI to identify the reasons for borrower dropouts, which may well be due to borrowers only being offered services that are no longer suitable to client needs. This has been noticed with some compulsory savings schemes of certain MFIs, which have led to clients leaving the institution after a certain number of loan renewals, and moving to other MFIs.
• Outreach or penetration rate provides a means to compare, for each branch, the institution’s clientele with the active population in the area, which would be its maximum potential. This rate permits comparisons with neighbouring organizations and changes over time, providing a means to measure progress. It may also highlight saturation risks (over-indebtedness, market saturation, etc.) when the penetration rate is very high. The depth of poverty outreach – i.e. the relative poverty level of an MFI’s client base compared with the local and national environments – is also an important indicator to be monitored. The recent CGAP Poverty Assessment Tool (see: www.cgap.org) offers a practical instrument that can be used by donors to help RFIs assess the depth of their poverty outreach.
• Client needs assessment may help RFIs to better ensure the adequacy of the financial services they are offering, relative to client demand. To this end, they might use the tools from AIMS (see Section 8.2.3) or from MicroSave.

(ii) Portfolio volume and quality. The volume and quality of loan portfolios should be compared to the pre-established objectives set forth in the RFI business plan, and to the mutually agreed minimum performance standards (when negotiated with the programme at programme inception stage). There are four ratios that can be monitored systematically regarding RFI partners: portfolio quality indicators (Table 7); operational efficiency indicators (Table 8); financial self-sufficiency or viability indicators (Table 9); and institutional viability indicators.

Table 7. Portfolio Quality Indicators*
Indicator	Formula	Purpose
Portfolio at risk	Total outstanding balance of overdue loans /Total outstanding balance	Measures the actual financial risk for the RFI due to loan arrears
Loan loss ratio	Total written-off loans / Average outstanding balance over the period	Measures the weight of irrecoverable loans over the period in question
Loan reserve ratio	Loan loss reserve / Total outstanding balance	Shows whether or not the level of reserves is sufficient for the portfolio
Loan arrears recovery ratio	Loans in arrears >30 days recovered / Average loans in arrears >30 days	Measures effectiveness of loan recovery procedures
* These are ratios proposed by the SEEP Network. See also CGAP’s Format for Appraisal of Microfinance Institutions for equivalent ratios and the methods of calculation.

In order to be efficient, an RFI should maintain 30-day arrears below 5%, and portfolio at risk below 10%. Any deviation from these thresholds may compromise the institution’s long-term viability and should be addressed immediately.

10.1.2.1 Operational efficiency indicators

Three indicators are used frequently to measure an RFI’s operational efficiency (Table 8):

• the cost per monetary unit lent, i.e. administrative efficiency;
• the number of active loans per loan agent; and
• the portfolio per loan agent.

Table 8. Operational Efficiency Indicators*
Indicator	Formula	Purpose
Administrative efficiency	Operating expenses / Average portfolio outstanding	Measures the efficiency of administering the loan portfolio
Number of active loans per loan agent	Number of outstanding loans / Number of loan agents	Measures loan agent performance and the efficiency of the methodology used
Portfolio per loan agent	Loan portfolio / Number of loan agents	Measures the potential financial productivity of loan agents
Cost per loan relative to per capita income	Cost per loan / Per capita income	Measures ability of borrower to service loan
* Proposed by SEEP Network.

10.1.2.2 Financial self-sufficiency indicators

Financial viability can be monitored using two ratios (Table 9) – one to evaluate operational self-sufficiency and the financial profitability of the RFI activity, and a second to assess the institution’s potential to cover its expenses (cost of funds, operating expenses, cost of loan loss reserve).

Table 9. Financial Viability Indicators*
Indicator	Formula	Purpose
Return on assets	Financial income/Average total assets	Indicates the financial productivity of the rural finance credit programme
Operational self-sufficiency	Financial income1/Financial and operating costs + Loan loss provision	Shows the institution’s capacity to cover the costs of its operations from internally generated income.
Financial self-sufficiency	Financial income/ Financial and operating costs2 + Loan loss provision + imputed cost of capital	Shows the institution’s capacity to be fully self-sufficient in the long term by covering all its expenses and maintaining the value of its capital
* Proposed by SEEP Network in Financial ratio analysis of microfinance institutions See also CGAP.
1/ Includes interest and fee income from loans + income from other finance-related services (fees for saving passbooks, insurance premiums etc…) + income from investments (interest from bank accounts or investments in market instruments used primarily for liquidity management) 2/ Financial cost include interest on debt and interest paid on deposits. Operating costs include personnel & admin expenses (such as depreciation, rent, supplies, transportation etc…)

Based on experience, the main variables that affect the financial performance of MFIs, and which MFIs can influence through policies and practices, are:

• the effect of the volume of activity on unit costs (economies of scale);
• the net income spread between the overall income yield on loans and the cost of funding, which can be increased by raising the interest rates charged on loans or lowering the costs of borrowing, or a combination;
• operating expenditures control, and sustainability has shown high sensitivity to salary structure; and
• maintaining high portfolio quality and containing loan defaults.

10.1.2.3 Institutional viability

Such viability pertains first and foremost to the quality of the structure’s internal organization and governance. The term is often used in evaluating the quality of the relationships between the Board of Directors (for MFIs with a board) and managers, but it can also be understood in the broader sense of good governance. It notably concerns the Board of Directors’ ability to guide and to:

• define the general orientation and the overall direction being taken by the RFI;
• adapt rapidly to changes in the socio-economic environment; and
• prevent or overcome crises.

The choice and composition of the Board of Directors, therefore, is crucial to the harmonious development of an institution.

Institutional viability also relates to the manager’s ability to lead the institution on a day-to-day basis by coordinating the people, resources and activities to attain the target objectives. This relates both to organizational quality – through distribution of roles, accounting and information systems, degree of decentralization, incentive schemes, human resources management, etc. – and to the attainment of a certain degree of social viability.

Finally, institutional viability concerns the MFI’s ability to eventually become licensed and regulated, which will enable it to start deposit mobilization and thereby diversify its funding base.

10.2 Operational Implications for IFAD

In order to reflect the outcome of the foregoing analysis, and to put conclusions into practice, four areas could be considered for action.

10.2.1 Training

Assuming that leadership for high quality rural finance programmes requires solid sectoral skills, then appropriate training could be envisaged to ensure that expertise is available where needed, including among both CPMs and programme managers in the field, whose capability profiles should match the technical requirements of rural finance programmes.

A training agenda could be developed in several ways, two of which are:

• Facilitate attendance at existing specialized training courses in rural finance and microfinance. Such training courses typically range from one to three weeks (e.g. Boulder, Harvard and New Hampshire Universities in the United States of America; Systèmes financiers decentralisés d’epargne et du crédit, Centre d’études financièrs, economiques et bancairs in France; CGAP and Support Unit for Microfinance donor courses). Courses provided through CGAP and donor-funded regional hubs – lasting usually one week – may be also be highly relevant for IFAD staff in the field.
• Develop training modules tailored to the specific rural finance needs and challenges confronting IFAD. These training events could be articulated around the structure of these Decision Tools for Rural Finance, and focus on the major cross-cutting and region-specific issues. A one or two day course could be organized at the time of an IFAD programme mid-term regional evaluation, thus benefiting from the simultaneous presence of many programme staff. Such a course could be structured around, first, discussing the Decision Tools for Rural Finance and how they apply to the specific regional context, and, second, a more in-depth exchange and structured training focused on two or three themes particularly relevant to the issues faced by IFAD rural finance programmes in that region.

10.2.2 Reviewing partnerships with IFAD cooperating institutions

The type of monitoring currently performed by IFAD cooperating institution may be further strengthened in terms of monitoring RFI development and performance. The challenge here will be to ensure that the cooperating institutions are able to assign staff who have the required technical expertise to carry out monitoring missions. At least two options could be explored in this respect.

• Cooperating institutions could build up internal technical capacity in the area of rural finance by specifically training the staff assigned to IFAD monitoring missions. To reinforce this, the compulsory attendance of relevant staff at the regional training hubs initiated by CGAP and donors could be one practical possibility.
• Cooperating institutions could retain institutions with specialized expertise during programme monitoring missions, which should occur at least annually. For example, IFAD may request that the cooperating institution sign an agreement with a recognized regional training centre or specialized subcontractor so that a consultant from the region, who has been certified by the relevant centre or subcontractor, would join the monitoring mission, for at least one such mission annually. Such agreement might be negotiated, for example, with the Microfinance Capacity Building Programme in Africa, Programmes de renforcement des capacités des institutions de microfinance en afrique francophone or MicroSave in Eastern Africa, the Microfinance Centre for Central and Eastern Europe and the New Independent States (based in Warsaw), or similar centres in Asia and Latin America. The additional cost of this specialized input could be reflected in the agreement signed between IFAD and the cooperating institution. It would remain a minimal investment, compared with the potential impact this could have on programme monitoring.

Ideally, multi-year contracts would be signed between the cooperating institution and the selected training centre or subcontractor. The contract should stipulate the requirements for the technical monitoring of IFAD rural finance programmes, covering a range of activities, from policy issues to RFI supervision. This will enable IFAD to obtain precise information on its rural finance programmes, as well as on the performance and development of its rural finance partners. IFAD should also be able to spot early warning signals of potential crises (portfolio or financial crisis; weakness in systems that might encourage fraud; governance issues; etc.) and take prompt remedial measures.

The interaction between these rural finance specialists and the PMU staff will also contribute to context-specific practical training for these staff, improving their ability to monitor IFAD programmes on a technical basis. Finally, the cooperating institution should be responsible for commissioning financial audits for the RFIs, analysing their financial statements and checking the performance indicators that those RFIs will be expected to collect on a regular basis during the year (see next section).

10.2.3 Collecting simple performance indicators from rural finance partners

IFAD could request its rural finance partners to furnish PMUs in the field with information on seven or eight basic performance indicators, on a regular basis. These should include: outstanding portfolio; number of clients (including proportion of women), and including number of new clients; volume of voluntary savings and number of savers (when relevant); average initial loan size; portfolio at risk (arrears >30 days); active portfolio; number of clients per credit officer; and operational self-sufficiency. The indicators might also need to be adapted as necessary to the different types of institutions and models funded by IFAD.

The indicators would normally be calculated by a RFI every quarter. Two of them might, however, be collected only half-yearly, due to their mode of calculation, namely operational self-sufficiency and financial self-sufficiency.

While the PMU would monitor these on a quarterly basis, IFAD will only need to receive them on a yearly basis, with a detailed analysis from the cooperating agency. This approach will help to increase the scope and quality of reporting on rural finance programme activities, while not adding to CPM workload.

10.2.4 Clarify the position of rural finance operations vis-à-vis the state

Rural finance programmes should, for the most part, be anchored in the non-governmental sphere and in civil-society initiatives. It is this orientation that is responsible for their dynamism and strength to date.

In many countries, governments have clarified their role in the field of microfinance, taking a supervisory role (providing licensing and supervising the sector), while providing an environment that is conducive to its development. This implies that the state has renounced any managerial or operator role in order to avoid being both judge and jury.

The dynamics of the relationship between PMUs within ministries (with government staff) vis-á-vis local RFIs deserves careful analysis in this context. Hierarchy-based power from PMUs and their staff relative to local RFIs is inappropriate, especially in countries where the government is both centralized and dominant. This may be a blocking factor in the development of grass-roots initiatives. The risk would be that governments start influencing strategic orientations and decisions on the part of RFIs, which might replicate the causes for the failure of former state-controlled credit programmes. This is where a distinction between programme fiduciary control and the technical monitoring of RFIs may need to be further discussed, in the context of the role and status of the PMU, with the aim of preserving the autonomy and independence of RFIs.

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