Finance for Enterprise Development and Employment Creation Project

Bangladesh is one of the most densely populated countries in the world, with a population density of 1,174 inhabitants per in 2011. Depending on the source, rural poverty stood between 43 and 53 per cent at the time of project design (2006). The agriculture sector (including crop, livestock and fisheries) makes up about 18 per cent of the country’s gross domestic product and is the main source of employment, absorbing 47.5 per cent of the workforce. The majority of farmers (53 per cent) are landless. While agriculture is the backbone of the rural economy in Bangladesh, it does not provide year-round income earning options. There are many microenterprises in rural and peri-urban areas in both agricultural and non-agricultural sectors which, if developed, could have a large potential to employ the rural poor. A key constraint to the growth of these microenterprises is access to finance and value chains.

The Independent Office of Evaluation of IFAD (IOE) has undertaken a project performance assessment (PPA) of the Finance for Enterprise Development and Employment Creation (FEDEC) in Bangladesh to: (i) provide an independent assessment of the overall results of the project; and (ii) generate findings and recommendations for the design and implementation of ongoing and future operations in the country.

Project design and implementation. The project was approved in September 2007. The IFAD loan effectiveness date was 8 January 2008, and the actual loan closing date was 30 September 2014, being a six-year implementation period. The PPA mission to Bangladesh took place in November 2014. The project goal was to stimulate pro-poor growth to increase employment opportunities and reduce poverty. The project objective was to expand existing microenterprises and establish new ones. To achieve the objective, the project design envisaged three key components: (i) microfinance services, (ii) value chain development (VCD); and (iii) project coordination and management.

The project was implemented by Palli Karma-Sahayak Foundation (PKSF) as the lead agency through partner organizations. PKSF is the government apex funding agency for non-governmental organizations, and held overall responsibility for project implementation under the conditions and terms of the Subsidiary Loan and Grant Agreement. PKSF worked with 159 partner organizations regarding microenterprise lending and with more than 44 partner organizations relating to VCD activities. These partner organizations (which also operate as microfinance institutions –MFIs - but are not limited to that function) have significant experience in providing microfinance while many have become familiar with microenterprise financing through earlier projects which did not have a focus on value chain access. Since retail financing to microenterprises was the main activity of the project, these partner organizations were actually the drivers of the whole project.

The total project cost at design was US$57.8 million, with the expectation of being proportionately shared by IFAD (61 per cent), Government/PKSF (38 per cent), and beneficiaries and partner organizations (1.3 per cent). At closure, the total actual project cost was US$314.74 million, financed by the IFAD loan to the amount of US$35.67 million (11.3 per cent), the PKSF contribution to the amount of US$57.06 million (18.1 per cent), and partner organizations and beneficiaries to the amount of US$222.01 million (70.6 per cent). The contribution of participant partner organizations to the microenterprise loan funds, although present from the beginning, increased dramatically towards the project end to enhance their equity participation in microenterprise lending.

The FEDEC approach was geared towards increasing the income of the rural poor by creating improved access to finance for the microenterprises. Development of a range of value chains was also an integral part of the project design and was envisaged to foster the economic growth of not only the microenterprises but also the backward and forward market actors thereby creating further employment for rural poor people in Bangladesh. The key assumption of the project was to reach the poor directly through the growth of microenterprises accessing microfinance, and indirectly through job creation. During implementation, a much higher number of microenterprises than initially targeted responded positively and met the eligibility criteria for receiving loans laid out by the implementing agency and, consequently, the partner organizations and the project tapped into this opportunity. However, the major risk identified was whether these microenterprises being financed were actually creating more employment and income for the rural poor.

The project financed four major categories of enterprises namely: trade and service, agriculture, and manufacturing and processing. The share of trade in total loan outstanding was the highest (48 per cent), followed by agriculture (25 per cent), services (15 per cent) and basic manufacturing and processing (12 per cent). Use of loans in trade was dominated by small retail businesses, while in agriculture the dominant sub-sector was livestock. Service sector loans were dominated by house construction and small-scale motorized passenger vehicles, while mini-garment production dominated the basic manufacturing and processing category. The project completed a revised number of 44 value chain sub-projects against an initial set target of 60. An analysis of the value chain sub- projects reveals that an overwhelming majority of them (91 per cent) are in agriculture including crops (flowers, vegetables, rice, bananas), fisheries/crab/ prawns and livestock.

Relevance. The project appropriately included both financial and complementary non-financial services but lacked support to any form of beneficiary organization. The objectives were relevant to the 2005 National Strategy for Accelerated Poverty Reduction and well aligned with the 2006 IFAD Country Strategic Opportunities Programme. Particular attention was given to scaling up microcredit initiatives to meet the needs of growing microenterprises and small businesses in the rural areas, thus contributing to the rural economy and job creation. Limited or lack of access to finance is indeed recognized as one of the key constraints to the growth of microenterprises in Bangladesh. The project also tried to improve the capacity of MFIs to provide non-financial services for business growth (training, marketing, technology, etc.) by providing technical support and through a VCD approach. In this last respect, the project was overly ambitious in scope given the short period of time available for implementation.

Micro-enterprises in Bangladesh provide not only sustainable income-earning options for entrepreneurs but also wage employment opportunities for poor people. The latter segment of the rural population, mostly landless, depends largely on agricultural labour opportunities which are periodic. However, the FEDEC did not really target the poor/most vulnerable or monitor their inclusion in, and benefits stemming from, the project. A much larger portion of loans went to the trading business, which employs relatively less people than the manufacturing and processing sectors. Employment creation for women was also not rigorously sought after. Not all partner organizations applied project guidelines regarding the eligibility of microenterprises for loans and sometimes loans were provided to microenterprises that could have accessed them through formal institutions.

Effectiveness. FEDEC has built the capacity of PKSF and partner organizations to efficiently support microenterprise development as per the objective. Overall project effectiveness, with respect to the number of microenterprises which received loans, was highly satisfactory as it reached the target mid-way through the project. With a very high recovery rate of 98.53 per cent, it appears that the microenterprise loan financing service has been able to create a strong foothold and is very likely to continue. The number of microenterprise borrowers registered an increase of 483,774 (from 79,403 on 29 February 2008 to 563,177 on 31 March 2014) (67.1 per cent women), against a target of 117,700 (an achievement of 411 per cent). Likewise, the average loan size went up from BDT 59,281 in February 2008 to slightly more than BDT 80,000 in March 2014. The project far exceeded the two critical lending targets, i.e. the number of borrowers and the average loan size/total loan outstanding.

Efficiency. The larger part of the overall project budget (98.6 per cent) was spent on microenterprise lending and the project performed very efficiently in this context. The original funds for microenterprise lending for the total project had been disbursed by mid-term. The recovery rate has also been outstanding. For loans given to partner organizations by PKSF, the cumulative recovery rate was 98.5 per cent, while that of loans given to microentrepreneurs by partner organizations was 99.15 per cent. The IFAD-PKSF eleven-year consolidated partnership and PKSF's in-depth knowledge of financial services combined with a network of 250 national partner organizations, provided FEDEC with a unique opportunity for sharing costs, ownership, trust and knowledge.

Rural poverty impact. Rural microenterprise entrepreneurs, the first target group of the project, significantly raised their income and assets as a result of microenterprise loans and families owning a microenterprise are now more food secure. However, the change was not as significant for the rural poor, often landless and/or female-headed households, the second target group of the project, who were expected to benefit from the growth of microenterprises through employment creation. Most microenterprises accessing loans did not belong to the most labour intensive sectors, and increased labour demand was largely absorbed by unpaid family labour.

PKSF introduced training on environment and regulatory issues related to microenterprises for PKSF and partner organizations’ staff. Unfortunately, this was not followed-up proactively with the microenterprises except for perhaps in the flower sub-sector. Results show a large increase in the production of nutrient-rich fish and some positive impact in terms of quality and quantity intake within the target households.

Sustainability. Considering the high recovery rate of microenterprise loans, it is very likely that PKSF and partner organizations will continue providing the service. In addition, since microenterprise lending also reduces transaction costs (bigger loan size compared to microcredits) the growth of microenterprise clients in the overall portfolio of each partner organization is likely to increase. Hence, the financial service for the target group can be considered sustainable. However, the picture for the non-financial services is not as bright. Integration of the private sector in an efficient and sustainable manner in the VCD projects was hardly visible. PKSF is committed to the sustainability of the microenterprise approach developed under FEDEC through its continued financing to, and supervision of, partner organizations. The IFAD-funded Promoting Agricultural Commercialization and Enterprises Project (PACE) approved in September 2014 also provides a great opportunity to consolidate the innovations introduced, particularly seasonal loans.

Innovation and scaling up. The project took an innovative approach by addressing the financing needs of the less-poor operating microenterprises with potential to expand. A key assumption was that the microenterprises would themselves employ more poor people following their growth. In VCD projects, some technology innovation in the local context was observed with, for example, the introduction of improved mung bean production technology, expanding high value and more labour-intensive flower production, prawn culture associated with fish, etc. FEDEC has promoted the introduction of new financing products (seasonal loans); as well as new varieties of crops (summer tomatoes, mung beans; gerbera, roses and gladiolas flowers, prawns, catfish) in areas where they were not produced before. PKSF has documented some of these innovations and has trained partner organizations to diversify their financing products. However, the absence of strong partnerships with the private sector undermines potential for scaling up innovative enterprises.

Gender equality and women's empowerment. A much higher proportion of loan recipients (67.1 per cent of 483,774 borrowers, a total of 324,612) were women. Notwithstanding the fact that most were used as a conduit by their male partners, many of them successfully mediated their access to credit to gain access to other resources and strengthen their voices in family decision-making. FEDEC’s contribution to increasing mobility and participation of women cannot be underestimated. One out of the eight microenterprises visited during the assessment was run by women. However, microenterprises and value chains seemed not to have been selected with conscious efforts to ensure gender equality and women's empowerment.


Targeting. PACE, based on lessons from FEDEC, should provide start-up capital to first generation ultra-poor (those immediately below the poverty line) with specific mechanisms and tailored financial products/non-financial services that would reduce risks in working with this target group. In addition, more careful selection criteria for microenterprise lending should be adopted and monitored carefully with priority to those working in sub-sectors with higher potential for employment generation and gender balance. This will require clear monitoring and evaluation of activities that include impact/outcome indicators linked to other services. The geographic focus should be in the poorest areas of the country, to increase the probability that more of the poor can benefit from employment creation.

Business/non-financial services. PACE should have a clear strategy on how to develop the business/non-financial service markets around the selected value chains. Value chain constraints to growth are often linked with lack of, or poor, service provisions either from within the chain (in embedded form) or from lateral provisions. The importance of embedded service provisions in agricultural sectors in Bangladesh cannot be underestimated as poor farmers can hardly afford an information service on a fee basis. To ensure sustainable impact, it is essential to develop/strengthen the service providers of the selected value chains instead of the project directly providing those services. PACE, therefore, needs to have a clear strategy to identify the service market gaps in selected value chain and build their capacity through facilitation activity with a clear exit plan.

Value chain development. Learning from FEDEC, PACE should refocus on a smaller number of pro-poor value chains as opposed to the 30 value chains foreseen. This also means that a simple view to VCD is not sufficient and assessments must identify not just blockages to access markets but all linkages related to input/output policies that may impact negatively on sustainability.

Institutions. In the development of enterprises and accessing value chains it is essential to develop them (producer/processor groups) into formal institutions and in the context of Bangladesh clear support should be given for these groups to form into companies. Such a process will strengthen their knowledge, roles and responsibilities to engage in business for further profit and/or expansion and will avoid potential elite capture. Support to farmers’ organizations could play a vital role by giving members improved access to market, information, and agricultural technologies, and related services and public goods.

Partnerships. PACE should place a high priority on developing a wide range of partnerships to leverage expertise, access and wider benefits to IFAD-supported projects. For example, they should partner with other IFAD-supported programmes in the country (implemented by the Ministry of Agriculture; and by the Local Government Engineering Department [LGED]) as well as with IFAD-supported regional programmes to support farmer organizations. As PACE aims at the development of 30 value chains, they should leverage on these partnerships with other relevant programmes. In particular, they should leverage their expertise and links with private companies that are involved in those programmes and are interested in undertaking joint market assessments, trainings and expanding access to the market for the microenterprise.


29 July 2016