Rural Financial Intermediation Programme
An interim evaluation of the Rural Financial Intermediation Programme (RUFIP) in the Federal Democratic Republic of Ethiopia was conducted in 2009. The main objectives were to: (i) assess the performance and impact of the programme; and (ii) generate a series of findings and recommendations to guide the Government and IFAD in the preparation of a possible second-phase programme.
Despite recent economic growth, Ethiopia remains one of the poorest countries in the world, ranking 169th out of 177 countries on the Human Development Index and 105th out of 108 countries on the Human Poverty Index. At a growth rate of 2.5 per cent, its population has grown to 83.1 million as of 2009 and is overwhelmingly rural. Poverty prevalence declined in 1999/2000-2004/2005, from 44 per cent to 39 per cent at the national level and from 45 per cent to 39 per cent in rural areas. At the time of RUFIP design in 2000-2001, the microfinance sub-sector was fairly nascent with an average lifespan of about three years or less.
During the period from appraisal in 2001 until 2008, the macro economy shifted from deflation to rising inflation. In 2001/2002, the average annual inflation rate stood at -10.6 per cent, whereas it surged to 44.4 per cent during the 2008 calendar year. As a result of effective measures taken by the Government, inflation fell to 2.7 per cent in June 2009. However, during that period, interest rates did not keep pace with inflation, resulting in highly negative real rates.
The programme aimed to enhance access of the rural poor to regular and reliable financial services. The specific objectives were to (i) expand outreach to about 1.5 million rural households through financial deepening, institutional development, and provision of equity and credit funds concomitant with savings mobilization; (ii) develop a community banking framework through the establishment of self-managed rural savings and credit cooperatives (RUSACCOs); and (iii) promote linkages between rural financial institutions and the banking sector. The intervention comprised four components: (a) institutional development: 19 per cent of base costs; (b) improved regulation and supervision of microfinance institutions (MFIs): 2 per cent; (c) equity and credit funds: 78 per cent; and (d) programme coordination and management: 1 per cent.
RUFIP was approved by the Executive Board in December 2001 and declared effective in January 2003. Completion and loan closing dates are 31 March 2010 and 30 September 2010, respectively. Total programme costs were estimated at US$88.73 million, of which US$25.7 million (29 per cent of total cost) was financed by IFAD; US$37.5 million (42 per cent) by the African Development Bank (AfDB); US$20.2 million (23 per cent) by the Development Bank of Ethiopia (DBE) and other participating commercial banks; US$4.5 million (4 per cent) by the Government; and US$0.8 million (1 per cent) by participating MFIs. The International Development Association (IDA, World Bank Group) was the programme's cooperating institution, responsible for loan administration and programme supervision.
Summary of iImplementation results
The programme's main implementation results were in accordance with and, in a number of cases, significantly above the targets established at appraisal. However, issues related to procurement caused delays in training and capacity-building. In line with programme design, the evaluation separately discusses the two rural finance sub-sectors covered by RUFIP, namely, the microfinance and credit cooperatives sub-sectors. It is important to bear in mind that around 90 per cent of total programme resources were allocated to the microfinance sub-sector.
The programme helped to bring about a significant increase in the number of MFIs. As of mid-2009, 26 such institutions were operational (19 of which have benefited from RUFIP assistance) with 2.2 million active clients (147 per cent of the appraisal target and 14.4 per cent of all Ethiopian households).
Financial outreach data on the microfinance sub-sector has also been significant, as exemplified by a 14-fold increase in the value of loans (in United States Dollars) outstanding over the life of the programme and an almost fourfold increase in average loan sizes (again, in United States Dollars). RUFIP loans have financed 11.3 per cent of the outstanding portfolio of the 19 MFIs covered by RUFIP, or 11.2 per cent of the 26 MFIs operational as of mid-2009. The contribution of the RUFIP loan as a source of funding of the loan portfolio varies widely, from 6 to 61 per cent. Concerning the repayment performance, an assessment of the portfolio-at-risk indicates that, while there is considerable variation; two thirds of the MFIs have stayed below the 5 per cent limit stipulated (2006 data).
While the overall savings mobilization by MFIs increased tenfold over the life of the programme, the share has since declined thanks to the influx of other sources of funds, particularly RUFIP and, more recently, bank borrowings. Up to the advent of RUFIP, savings increased as a percentage of loans outstanding, e.g. from 47 per cent at appraisal to 55 per cent as of December 2003. As of December 2008, savings accounted for 34 per cent of the portfolio.
RUFIP support to the microfinance sub-sector helped prepare the ground for commercial bank loans to MFIs. By the end of PY5, eight MFIs under RUFIP had borrowed a total of US$133.1 million from commercial banks. The Government-owned Commercial Bank of Ethiopia (CBE) is the major lender to MFIs, at both preferential interest rates and on collateral conditions. As of 30 June 2008, MFI borrowings from banks accounted for 29.1 per cent of the outstanding portfolio. In line with its Rural Finance Policy of 2000, IFAD's credit line has thus served as a bridging fund, attracting a substantial amount of commercial bank resources on the domestic market.
The programme allocated US$8 million (or 9 per cent of the overall budget) to provide equity for MFIs. Reportedly, MFIs have shown little interest in equity investments of RUFIP funds by DBE, the bank that would have been responsible for channelling RUFIP investments. As a consequence, the funds were finally reallocated to the credit fund component. So far, MFIs have not paid any dividends as this would entail losing their tax-free privileges – a disincentive to potential investors. In addition, foreign banks or other entities are not permitted to make equity investments in MFIs.
The programme has provided support to the Micro Finance Supervision Division (MFSD) of the National Bank of Ethiopia (NBE), which now carries out regular supervisions of MFIs. NBE has also drafted new microfinance legislation, building on its experience and international best practices.
Activities related to MFI institutional development and capacity-building have had a mixed implementation record. Supply of vehicles and computers to implementation partners, support to the Association of Ethiopian Microfinance Institutions (AEMFI), development of training modules, training of sub-branch-level staff and MFI board members, staff-exposure visits and savings mobilization, have all achieved positive implementation results. Other activities, such as diversifying ownership, client education, product development, MFI staff training and improving management information systems, have performed less well, mainly owing to delays in procurement. RUFIP supported a comprehensive training needs assessment, which led to the preparation of detailed training modules. Despite implementation delays, RUFIP has trained well over 3 000 MFI staff with the support of AEMFI, which was able to mobilize alternative funding sources to help carry out the training programmes.
Credit cooperative sub-sector
nstitutional development and capacity-building are the only subcomponents of the financial cooperative sector to which funds have been disbursed. This is because RUSACCOs were unable to meet the RUFIP criteria to access credit funds, as established jointly with stakeholders. Owing to weaknesses in the reporting system, all RUSACCO financial and membership data are unreliable.
Having said that, by the end of PY5, some 2,529 RUSACCOs (113 per cent of the appraisal target) had been established. Total membership reportedly stands at 183,649 (205 per cent of the appraisal target), all of whom are shareholders and savers; the average membership of each RUSACCO is 73. This includes 651 women's RUSACCOs (271 per cent of appraisal target), with 24,096 members (251 per cent of appraisal target); the average size is 37 members, compared with 85 members in all-male and mixed RUSACCOs. 49 per cent of all RUSACCO members are women, thanks to special efforts to include them under RUFIP. Ninety-six per cent of the RUSACCOs are to be found in the four original, most populous, programme areas.
The financial operations of the RUSACCOs are entirely self-financed. As of June 2008, total member savings were reported to stand at US$3.33 million, averaging US$18 per member. Total equity was US$2.99 million. Without adjustment for inflation, total savings were reported as 53 per cent of appraisal estimates; in constant prices of the year of appraisal, they were but a fraction of that amount. Some 44,894 members were reported as borrowers, corresponding to 18 borrowers per RUSACCO and 24 per cent of total membership. Loans outstanding were given as US$2.42 million. Loan amounts were below the actual demand that RUFIP set out to satisfy.
RUSACCOs reacted to the credit crunch by lowering loan sizes and shortening loan periods. These unfavourable loan terms were given as the main reasons for the lack of growth in membership and for drop-outs.
Relevance. Programme design was consistent with both national policies and IFAD strategies prevailing at the time of design. The overall development objectives set out at design remain highly relevant, given the high demand for rural financial services in areas with almost non-existent access to formal financial institutions. Specific programme objectives have also generally remained relevant – namely, expanding outreach, financial deepening, institutional development, savings mobilization, provision of incremental credit, operational sustainability and enhanced governance. However, the relevance of RUFIP equity investments in MFIs must be questioned, there having been no effective demand. The huge (although unforeseeable) spike in inflation, particularly in 2008, raised concerns as to the relevance of savings promotion and, indeed, debt financing for the sector, although the rapid decline in inflation witnessed in 2009 seems to allay this concern.
Effectiveness. Overall, the programme achieved both its primary objective of promoting access to financial services for the rural poor, and its specific objectives, expanding outreach to well over 1.5 million rural households targeted at appraisal, and promoting linkages between rural financial institutions and the commercial banking sector. It also successfully supported expansion of the credit cooperative sub-sector (the community banking framework) although there are concerns regarding the sustainability of these grass-roots institutions.
Efficiency. In general, the programme achieved or exceeded its planned objectives at similar costs to those estimated at appraisal. It helped build up the efficiency of Ethiopian MFIs by providing low cost-incremental credit, thereby creating economies of scale that allowed the MFIs to expand their markets while lowering unit costs. The single most important factor undermining the efficiency of the MFIs, particularly in 2008, was their failure to adjust lending rates to positive real levels. Overall, the credit cooperative sub-sector is inefficient, as the programme's emphasis on institutional expansion was not matched by a sustainable cost structure. Under conditions of inflation without interest rate adjustment, the value of share capital and members' savings decline every year. Without access to external sources of refinancing, loans are so small that members cannot compensate the loss of value of their savings from the gains of their credit-financed investments. Ultimately, therefore, this renders the cooperatives inefficient. This situation also reflects on RUFIP, which placed emphasis on expansion but without activities aimed at financial system development and institution-building.
Rural poverty impact
In general, measuring the impact of microfinance presents a number of methodological challenges and, in the context of this intervention, it has not been possible to directly attribute impact to RUFIP. The programme has undoubtedly made both a direct and indirect contribution to expanding the MFI sub-sector; but it is not possible to quantify the extent. As far as the credit cooperatives sub-sector is concerned, attributing impact to RUFIP is even more difficult. On the one hand, RUFIP support to the Federal Cooperative Agency has been a crucial factor in stimulating the tremendous increase in the number of RUSACCOs in anticipation of RUFIP support; on the other hand, the RUSACCOs had no access to the RUFIP credit line and only limited, greatly delayed, capacity-building support. In view of difficulties in developing the credit cooperative sub-sector, the overall rating for impact on rural poverty is considered only moderately satisfactory.
Sustainability and innovation
Sustainability. RUFIP design incorporated a clear approach to achieving post-programme sustainability. Ethiopian MFIs have achieved operational self sufficiency ratios that are among the highest in Africa and, thanks to support provided through RUFIP, commercial banks have begun providing loans to MFIs. The potential for resource mobilization this indicates, along with the huge unmet demand for rural financial services and the strong commitment demonstrated by the Government to continue providing support, bodes well for sustainability of the microfinance industry in Ethiopia. That said, the viability and sustainability of established RUSACCOs gives rise to concern. Rapid expansion has not been accompanied by adequate support in financial terms, as the programme rightly refrained from making funds available to cooperatives that did not meet the requisite performance criteria.
Innovation, replication and scaling up. There is limited evidence of innovation, adoption of new agricultural technologies or replication, despite explicit references in programme design to the need to develop innovative loan products more attuned to the needs of the rural poor. The cofinancing arrangement with AfDB made it possible to expand the programme's outreach throughout the country, thereby helping RUFIP to become the rural finance programme in Ethiopia.
Performance of partners
With the exception of AfDB, the performance of partners involved in RUFIP has been assessed as moderately satisfactory or better. IFAD was commended for its design process, staff continuity and flexible approach during implementation, and continuous positive follow-up. However, it could have done more with regard to addressing management constraints and issues related to the credit cooperative sub-sector. The Government and its agencies contributed to the successful design and implementation of RUFIP, supporting the programme with an increasingly robust microfinance policy framework (also thanks to the programme), and allowing implementing agencies to work autonomously and without interference. However, the programme coordination and management unit (PCMU) was understaffed and programme coordination met with difficulties throughout the entire implementation period. The regulatory framework necessary to ensure successful implementation of the cooperative credit component is still to be developed. IDA/World Bank, the cooperating institution for RUFIP, fielded regular supervision missions and addressed most fiduciary issues in a rapid and effective manner. While AfDB was the main cofinancier of the programme and its significant financial contribution made it possible to expand outreach throughout the country, strong staff discontinuity and a rather inflexible approach to procurement regulations presented a real constraint on implementation.
In line with the assessment, the programme's overall achievements have been rated as satisfactory. The ratings in relation to each criterion and for partners' performance are presented below.
|Core performance criteria
|Rural poverty impact|
|Household income and assets||4|
|Human and social capital, and empowerment||4|
|Food security and agricultural productivity||3|
|Natural resources and the environment||*n.a.|
|Institutions and policies||4|
|Overall poverty impact||4|
|Other performance criteria|
|Innovation, replication and scaling up||4|
|Overall programme achievement||5|
|Performance of partners|
a/ Ratings are assigned on a scale of 1 to 6 (6=very satisfactory;
5 = satisfactory; 4 = moderately satisfactory; 3 = moderately
unsatisfactory; 2 = unsatisfactory; 1 = very unsatisfactory)
* Not applicable
The IFAD-funded intervention addressed the two main sub-sectors of rural finance in Ethiopia: (i) the regulated microfinance sub-sector, which was well advanced and part of the formal financial sector; and (ii) the credit cooperative sub-sector, which was still in its infancy and not regulated by a financial authority. In taking account of these factors, the design of RUFIP focused on the different needs of the two sub-sectors, with strong emphasis on provision of incremental resources for on-lending through MFIs and targeted institutional support on the one hand (around 90 per cent of total resources); and, on the other hand, greater focus on capacity-building for the credit cooperative sub-sector. Given the vastly different stages of development of the two sub-sectors at start-up, the programme had differing levels of success in achieving its objectives in support of MFIs and credit cooperatives.
The microfinance sub-sector has greatly benefited from RUFIP support, particularly through the access that a small number of strong MFIs had to IFAD and AfDB credit lines and to RUFIP technical assistance, which allowed them to substantially expand their outreach. This was complemented by assistance provided to NBE and the capacity-building support made available, with RUFIP assistance, to the entire MFI network through AEMFI. The clearest indication of the end result is the provision of commercial credit lines through a growing number of commercial banks, indicating the increasing maturity of the sector. While this is a major accomplishment, it remains circumscribed to a limited number of cases. RUFIP has been successful in achieving its objectives with regard to the microfinance sub-sector, with a real and sustainable impact on rural poverty and the development of institutions that are now beginning to consider raising capital on commercial terms (the ultimate sustainability litmus test for a financial institution). Although the performance of RUFIP in support of the growing microfinance sub-sector has been very positive, more remains to be done if continued expansion is to be sustained. Rural Ethiopia, which continues to be poorly served by commercial financial institutions, has a huge pent-up demand for access to rural financial services. At present, one of the most pressing issues is to provide access to financial resources in order to stimulate expansion and meet demand.
In contrast, the emerging credit cooperative sub-sector has benefited from mobilizing government resources under the institutional framework provided by RUFIP for establishing large numbers of credit cooperatives. The emerging institutional strength of these cooperatives is to be found in three areas: presence at the community level; character as self-governed and self-financed self-help organizations; and individual lending technology. The cooperatives operate at low cost, but with inadequate margins. With RUFIP assistance, their number has expanded rapidly; yet their viability has been affected by having to operate in a regulatory void. There is real concern that the widespread and very rapid expansion of the RUSACCOs may not be sustainable. Designing a credit cooperative structure with a fully functional operating system and an arrangement for appropriate regulation and supervision by a financial authority should have come first.
In view of the foregoing, and based on the evaluation findings, it is clear that RUFIP may be considered to have been successful, and has therefore been rated as satisfactory. This rating has been possible thanks to the programme's strong overall performance, which balances the issues identified in this analysis. The programme is relevant and has been effective in achieving its results (especially with regard to microfinance activities). It has had a positive impact on rural poverty in a number of domains.
Based on the evaluative evidence and analysis presented in this report, there is a strong case for developing a second phase of RUFIP. The following recommendations on strategic and operational issues should be carefully considered in the design and implementation of an eventual second phase of RUFIP.
Separate sectoral focus on MFIs and credit cooperatives for future IFAD support in Ethiopia. The performance of RUFIP has been mixed: achievements in the microfinance sub-sector have been significant, whereas implementation progress in activities related to RUSACCOs has been limited. IOE understands that both IFAD and the Government are strongly committed to continuing to support the rural finance sector. In the light of this, it is the view of IOE that careful consideration should be given to the further development of the MFI and RUSACCO sub-sectors.
While both sub-sectors have great potential (albeit with very different strategic requirements) for a possible second phase of RUFIP, IFAD should consider supporting the two sub-sectors independently.
Enhancing savings mobilization in the microfinance sub-sector. Given the vast underserved rural market in Ethiopia (estimated at about 85 per cent), a major constraint faced by MFIs in broadening and deepening their outreach is the shortage of loanable funds. Savings represent an important source of funds and provide the basis for institutional self-reliance. Since their inception, Ethiopian MFIs have mobilized increasing amounts of savings, yet are still far from exhausting this potential source of funds. Several different strategies will need to be pursued, particularly in terms of expanding outreach: (i) developing new savings deposit products and expanding outreach in savings mobilization efforts among rural households; and (ii) ensuring that attractive deposit rates are offered in order to mobilize deposits while MFIs continue to remain operationally-sustainable institutions.
Engage in policy dialogue with the Government to facilitate the mobilization of funding for MFIs. There is a huge unmet demand for microfinance in rural Ethiopia. While RUFIP has provided access to funding, continuing to expand the outreach of MFIs calls for mobilizing additional resources, either through continued borrowing from RUFIP-type initiatives or through commercial banks. Over the longer term, if the MFI sub-sector is to continue to expand to meet unmet demand for rural financial services, in the follow-up phase RUFIP should encourage commercial bank lending to MFIs.
This would entail entering into policy dialogue with the Ministry of Finance and Economic Development, NBE and commercial banks on several issues, and exploring the potential, inter alia, for: (i) creating an MFI apex institution in the medium to long term in order to: mobilize financial resources from domestic and international resources; wholesale such resources to MFIs on a competitive basis; and supervise MFIs on behalf of NBE in accordance with international best practices; (ii) assisting in the establishment of a credit guarantee fund that would make it possible for MFIs to borrow on commercial terms without significant collateral requirements; and (iii) studying collateral-substitution mechanisms, including independent ratings of MFIs as currently implemented in other countries.
Develop an appropriate regulatory and supervisory system for RUSACCOs. Should RUFIP continue to provide support, under a second phase, for further developing the credit cooperative network, this would require a system of appropriate regulation and supervision by a financial authority, a fully functional operating and reporting system and the complementary institutional capacity-building functions that this would require. The second-phase programme could build on the significant international experience acquired, by forging a partnership with an institution that has a recognized track record in credit cooperative system development. This would make it possible to leverage international technical assistance in credit cooperative system development (recognized centres of excellence in this field include, inter alia, the German Cooperative and Raiffeisen Confederation, World Council of Credit Unions and Rabobank) to complement IFAD financial assistance. The exact course of action would be determined by the Government in consultation with the international technical assistance partner, stakeholders in the credit cooperative sub-sector, and IFAD.
05 December 2011