35812 AID EFFECTIVENESS INITIATIVE MICROFINANCE DONOR PEER REVIEWS APRIL 2004 Global Results:Analysis and Lessons Seventeen development agencies participated in the Microfinance Donor Peer Reviews as part of an aid effectiveness initiative to improve donor practice. LIST OF AGENCIES PARTICIPATING IN THE PEER REVIEW EXERCISE Donor Agency Date Donor Reviewers CGAP Reviewers Bilateral Agencies Agence Française de 10-14 March Camilla Bengtsson, Sida Brigit Helms Développement (AFD) 2003 Roland Siller, KfW Eric Duflos Canadian International 9-13 June Ross Croulet, AfDB Jennifer Isern Development Agency (CIDA) 2003 Kate McKee, USAID Eric Duflos DANIDA 28 April- Doris Wong, CIDA Xavier Reille 1 May 2003 Kathy von Daeniken, SDC Eric Duflos Department for International 13-17 May Kate McKee, USAID Brigit Helms Development (DFID) 2002 Leila Webster, World Bank Group Alexia Latortue Gesellschaft für Technische 14-18 July Nimal Fernando, AsDB Alexia Latortue Zusammenarbeit (GTZ) 2003 Craig Churchill, ILO Eric Duflos Kreditanstalt für Wiederaufbau 14-18 Oct Anne Clerc, AFD Syed Hashemi (KfW) 2002 David Ferrand, DFID Alexia Latortue Netherlands 19-23 May Bernd Balkenhol, ILO Syed Hashemi 2003 Mavis Owusu-Gyamfi, DFID Alexia Latortue Sanjay Sinha, EDA Rural Systems Norwegian Agency for 4-7 June Gabriela Braun, GTZ Brigit Helms Development Cooperation 2002 Stav Zotalis, AusAID Alexia Latortue (NORAD) Swedish International 20-24 May Richard Roberts, FAO Brigit Helms Development Agency (Sida) 2002 David Stanton, DFID Alexia Latortue Swiss Agency for Development and 18-22 Aug Dirk Steinwand, GTZ Brigit Helms Cooperation (SDC) 2003 Johan de Waard, Netherlands Eric Duflos US Agency for International 10-18 Nov Richard Boulter, DFID Brigit Helms Development (USAID) 2003 Henri Dommel, IFAD Eric Duflos Multilateral Agencies African Development Bank 6-10 May Camilla Bengtsson, Sida Elizabeth Littlefield (AfDB) 2002 Stephan Boven, EBRD Alexia Latortue Asian Development Bank 8-12 July Henri Dommel, IFAD Syed Hashemi (AsDB) 2002 David Stanton, DFID Alexia Latortue European Commission (EC) 24-28 March Henri Dommel, IFAD Brigit Helms 2003 Gisela Strand, Sida Eric Duflos International Fund for Agricultural 17-21 June Heather Clark, UNCDF/UNDP Douglas Pearce Development (IFAD) 2002 Hege Gulli, NORAD Alexia Latortue International Labor Organization 10-14 Feb Hege Gulli, NORAD Brigit Helms (ILO) 2003 Peter Kooi, UNCDF/UNDP Alexia Latortue UN Development Programme and 21-25 Oct Nimal Fernando, AsDB Brigit Helms UN Capital Development Fund 2002 Arlina Tarigan-Sibero, KfW Alexia Latortue (UNDP and UNCDF) Acknowledgements: The authors would like to express their gratitude to the 29 donor staff from 21 agencies who comprised the peer reviewers and/or organizers for this exercise. We would also like to thank the eight CGAP colleagues and partners who participated in reviews and field visits. They all enthusiastically embarked on these challenging yet collegial reviews, and actively contributed to the drafting of the letters to management upon which this report is largely based. Any errors or omissions, however, remain the responsibility of the authors. EXECUTIVE SUMMARY aid modalities and moving "upstream", a shift Tackling aid effectiveness is one of the biggest toward generalist staff among donor agencies, challenges facing the international development and the decentralization of operations. community. Early in 2002, the Consultative Five core elements of effectiveness emerged Group to Assist the Poor (CGAP) joined with from the 17 Microfinance Donor Peer Reviews. former U.K. Secretary of State for Development These elements, while not exhaustive, are key to Clare Short to launch a unique aid effectiveness improving aid effectiveness at the individual initiative using microfinance as a test case: agency level. These same elements also help Microfinance Donor Peer Reviews. determine an agency's comparative advantage Championed by Ministers and Heads of in microfinance vis-à-vis other donors when Agencies, 17 development assistance agencies supporting financial services for the poor. participated in the reviews. Strategic Clarity: The coherence of an Although microfinance represents a small agency's vision of microfinance, and whether percentage of most agencies' budgets, it is an this vision and agency policies are in line appropriate focus for the reviews. All with accepted good practice. participating donors have agreed in principle to Staff Capacity: Whether the standards of microfinance good practice, but Strong microfinance focal unit has sufficient their performance on the ground does not capacity and resources to provide skilled uniformly reflect their commitment. CGAP technical support to operational colleagues. facilitated and documented the reviews on Also, whether the overall level of technical behalf of the donors, and continues to provide capacity is adequate to ensure quality follow-on technical support. operations. The Microfinance Donor Peer Reviews Accountability for Results: The level of addressed aid effectiveness from a different knowledge of the microfinance portfolio perspective. Rather than concentrate on (e.g., whether it is "visible" to the agency) constraints at the country level, the reviews and transparency on portfolio performance. focused on donor agencies' own procedures, practices, processes and systems. The reviews Relevant Knowledge Management: How were collegial exercises, involving over well the agency learns from its own and 900 donor staff from 21 agencies as reviewers, others' experience through the creation, hosts and/or interviewees, and offering valuable dissemination and use of practical, user- opportunities for mutual learning and exchange. friendly knowledge. The reviews identified success factors and Appropriate Instruments: Whether an constraints to good microfinance practice, and agency has instruments that allow it to work offered concrete recommendations for change. directly with the private sector - a critical All participating agencies opted to publicly pre-condition for effectiveness in disclose their results, and implementation of the microfinance. The quality, range and recommendations is underway at most agencies. flexibility of instruments are also crucial. Actions taken include developing new vision For each of these elements, this paper highlights statements for deepening the reach of the current donor challenges and presents financial sector; strengthening business plans recommendations from the Peer Reviews, with and staffing of microfinance focal units; specific examples of good donor practice. conducting portfolio reviews; implementing The Peer Reviews mark the beginning of a long systems of project performance indicators; road to improving aid effectiveness in drafting operational "how to" notes for non- microfinance and beyond. To ensure that the microfinance specialists; facilitating staff Peer Review experience translates into better training; stopping non-performing credit lines; development impact - increased access to and introducing incentives for technical financial services among the world's poor - specialists to provide advice. donors will need to build on management's The Peer Reviews also revealed several trends commitment to change, identify their in development assistance that affect aid comparative advantage in promoting financial effectiveness overall and have considerable services for the poor and act accordingly, implications for donor support of microfinance. collaborate in ways that leverage each others' These trends include the increasing use of new strengths, and jointly tackle common challenges. TABLE OF CONTENTS I. BACKGROUND 1 A. Microfinance as a Test Case for Aid Effectiveness 1 B. Review Process 1 C. Initial Results 2 II. TRENDS AFFECTING AID EFFECTIVENESS 3 A. New Aid Modalities and Moving "Up-stream" 3 B. Move Toward More Generalist Staff 4 C. Decentralization 4 III. ELEMENTS OF AID EFFECTIVENESS 5 A. Strategic Clarity 5 B. Strong Staff Capacity 7 C. Accountability for Results 9 D. Relevant Knowledge Management 11 E. Appropriate Instruments 13 IV. IMPLICATIONS FOR THE FUTURE: NEXT STEPS 14 A. Build on High-level Commitment 15 B. Identify and Act on Comparative Advantage 16 C. Collaborate According to Comparative Advantage 17 D. Develop a Joint Agenda 17 I. BACKGROUND an appropriate technical area for review because donors have already agreed to Aid effectiveness is a top priority for the standards of microfinance good practice, but international development community. Whether their performance does not uniformly reflect tackling the global Millennium Development their commitment. CGAP, as a consortium of 28 Goals (MDGs) or working with governments bilateral and multilateral donors and on Poverty Reduction Strategies at the country foundations working in microfinance, was well- level, donor agencies seek to improve their positioned to facilitate and document the effectiveness to achieve concrete development reviews on behalf of donors and to provide outcomes and eliminate poverty. follow-on technical support. Early in 2002, the Consultative Group to Assist Microfinance is a rapidly changing field. In the the Poor (CGAP) joined with former U.K. past, microfinance was principally associated Secretary of State for Development Clare Short with microenterprise credit provided by NGOs. to launch a series of Donor Peer Reviews as Today, it encompasses a diverse range of Part of an initiative to improve aid financial services (savings, credit, insurance, effectiveness, using microfinance as a test case. and payment transfers) provided to a wide The Microfinance Donor Peer Reviews variety of clients (poor landless women, addressed aid effectiveness from a unique retirees, urban families, rural entrepreneurs) perspective. Rather than concentrate on through many different types of institutions constraints at the country level (governance, (banks, NGOs, credit unions). corruption, macroeconomic instability, etc.), the Increasingly, leaders in the field see reviews focused on what donor agencies could microfinance as a means to expand and deepen most directly influence: their own procedures, the financial sector, rather than simply to practices, processes and systems. Reviews were provide credit to specific target clients (e.g., not formal evaluations or detailed portfolio microentrepreneurs). For donors, a financial reviews. Rather, they were collegial, supportive sector approach to microfinance entails exercises that identified success factors and building the capacity of retail-level financial constraints to good microfinance practice. intermediaries, as well as establishing links with new types of actors, such as commercial This report summarizes the findings and banks, rating agencies, investors and policy recommendations of 17 completed Peer makers. Reviews and three field visits to Uganda, India and Mali.1 It is organized in four parts. The B. Review Process present section provides information on the review process and initial results of the Peer The review teams were generally comprised of Reviews. Part II explores selected trends in two senior technical staff from other donor development cooperation that have implications agencies involved in microfinance, plus two for overall aid effectiveness. Part III introduces CGAP staff. The teams visited the head office five key elements of effectiveness that emerged of each agency for one week. During that time, from the Peer Review exercise, then analyzes team members met or spoke on the phone with the challenges faced by donors, makes an average of more than 50 people, recommendations to improve the effectiveness interviewing a wide cross-section of staff and of their microfinance operations, and offers partners. The people interviewed held a variety examples of good donor practice. The final of technical, administrative, operational, and section of the report explores the implications managerial positions, both at headquarters and of the Peer Reviews for how donors can better in the field. support financial services for the poor. The teams then presented an initial analysis and A. Microfinance as a Test Case for Aid A list of the agencies that participated in the reviews and field 1 Effectiveness visits can be found on the inside cover of this document. For com- plete information on the Peer Reviews, please refer to the "Donor Although microfinance represents a small Effectiveness - Donor Peer Reviews" section of the CGAP website percentage of the budgets of most agencies, it is at www.cgap.org. 1 specific recommendations to top management microfinance specialist staff in regional and and staff of the agency. The presentation and operational departments), the Peer Reviews ensuing feedback from agency personnel would have risked being perceived as a closed formed the basis of a letter to management with exercise. The likelihood of subsequent recommendations,2 submitted some eight weeks organizational change was minimal unless top after the actual review.3 management was fully engaged in the exercise. Many agencies have indicated that the review When open to all, the de-briefing sessions process, analysis and recommendations are offered a non-threatening opportunity for relevant beyond microfinance. The following management and staff to reflect together on the lessons can inform donor agencies about how to modus operandi of their agency. conduct successful exercises of this nature. Relationship with focal point Composition of the review team The relationship between the review teams and Participating donor agencies appreciated that the focal points was somewhat delicate. An peers - not consultants - were the reviewers. The implicit purpose of the reviews was to support fact that members of the review teams faced the efforts of the focal point to improve many of the same problems in their own microfinance practices within the agency. There agencies made the exercise less threatening than was a fine line, however, between supporting typical evaluations and fostered greater the focal points and maintaining objectivity. empathy and candor. Reviewers valued gaining The review team depended on the focal points in-depth understanding of other agencies and to set the agenda and steer them in the direction widening their network of contacts with donor of major areas of concern. Yet the process could colleagues. backfire if the teams were perceived as co-opted by the focal point. Given their different roles, Pre-review planning the review teams and focal points sometimes Given the short time frame, preparation was differed in their opinions about challenges and indispensable to the reviews. It was particularly possible solutions. important to carefully pre-select staff who would be interviewed. The Peer Review teams Openness and awareness of donor staff also studied relevant documents and were All review teams were impressed with the briefed by the microfinance focal point (the interest that donor staff showed in the reviews. person or unit responsible for microfinance Staff had specific ideas on what does and does within the agency) before the review. Despite not work and why, as well as on how to enhance intensive, time-consuming preparatory work, the effectiveness of their agencies. The findings focal points considered the reviews a and recommendations of the review teams worthwhile investment. largely reflected the views of the many donor staff who gave generously of their time. Management involvement In a notable but uncommon occurrence for C. Initial Results many agencies, top management and staff engaged in detailed discussions on constraints The Peer Reviews generated results at several for effectiveness. Without the active levels, including individual agency decisions, participation of management (and non- actions, and shifts in mindset. Other results cut across numerous agencies and are apparent in changed relationships and a heightened sense of shared purpose. The following points illustrate The letters made public by AfDB, EC and NORAD are edited ver- 2 sions, while those of AFD, AsDB, CIDA, DANIDA, DFID, GTZ, some of the initial results of the reviews. ILO, IFAD, KfW, the Netherlands, Sida, SDC, UNDP, USAID are available as originally submitted to management. The letters can be Lever for overall aid effectiveness found in the "Donor Effectiveness--Donor Peer Reviews" section of Several heads of agencies found the Peer www.cgap.org. See E. Duflos, B. Helms, and A. Latortue, Letters to Management: Findings and Recommendations; Aid Effectiveness Reviews relevant to improving effectiveness Initiative: Microfinance Donor Peer Reviews (Paris: CGAP, 2004) within their agencies beyond microfinance. for a complete set of the letters. Analysis of the specific technical area of The terms of reference, developed by participating donors and 3 microfinance applied to much of the agencies' CGAP staff, can be found on the CGAP website (www.cgap.org) in the "Donor Effectiveness--Donor Peer Reviews" section. work in other sectors of development, 2 particularly in private sector development. The in which the CGAP operational team works methodology of the Peer Reviews was also seen and the services it offers. For example, in as a quick and effective means to generate new response to donor demand for information ideas for improving other sectors. tailored to the needs of non-microfinance In the spirit of strengthening overall aid specialists, CGAP developed a comprehensive, effectiveness, CGAP is now establishing online set of information products specifically linkages with other institutions concerned with for donor staff.5 CGAP also partnered with the the issue, such as the OECD/Development Special Unit for Microfinance at UNCDF to Assistance Committee (DAC), the United design and offer a new training course for States Treasury, and the Executive Directors of donors that integrates many of the findings of the World Bank. These links are important the reviews. conduits for reinforcing the messages of the Peer Reviews on what is required for aid II. TRENDS AFFECTING AID effectiveness. They also help maintain the EFFECTIVENESS momentum needed to institute changes. The Peer Reviews revealed several trends in development assistance that are affecting aid Transparency and increased "networking" In a noteworthy commitment to transparency, effectiveness as a whole. Many of these trends are the result of political decisions made by all agencies opted to publicly disclose their parliaments or ministries, usually with the letters to management, which contain candid objective of improving the impact of analysis and practical recommendations. development assistance. However, several Relationships among staff, both within and trends have serious implications for effective among development agencies, also deepened as donor support of pro-poor financial services. a result of the Peer Reviews, which involved over 900 donor staff from 21 agencies as A. New Aid Modalities and Moving reviewers, hosts, and/or interviewees. Full "Up-stream" disclosure combined with intense interaction has provided the donor community as a whole Donor agencies today are focused on aid with a better basis for understanding the most effectiveness and reaching the MDGs. promising role that each agency can play in Consequently, they are applying new supporting financial services for the poor. approaches to achieve lasting systemic change, reduce transaction costs for recipient countries, Agency implementation of recommendations and increase local ownership of development The response to the Peer Reviews by senior efforts. Many agencies are moving away from management has been overwhelmingly positive the "project" approach toward a "program" and many agencies have made a serious approach. This new strategy includes direct commitment to bring about specific changes.4 budget support to national governments and These actions include developing new vision Sector Wide Approaches, which are usually statements for deepening the reach of the linked to Poverty Reduction Strategies. In this financial sector; strengthening the staffing and context, most of the agencies reviewed business plans of microfinance focal units; demonstrated a strong interest in participating implementing a system of project performance in policy dialogue, or working at the indicators; drafting operational "how to" notes "upstream" level. for non-microfinance specialists; facilitating While beneficial to aid effectiveness overall, the staff training; stopping non-performing credit focus on larger programs and policy work poses lines; and introducing incentives for technical certain trade-offs for expanding financial specialists to provide advice. Improvement in CGAP services CGAP staff benefited from in-depth exposure See A. Latortue, Update on Donor Actions Taken; Aid Effectiveness 4 to the daily realities of its member donors. Ten Initiative: Microfinance Donor Peer Reviews (Paris: CGAP, 2004) for detailed examples of the follow-up and reforms of many agencies CGAP staff took part in the reviews and field following the Peer Reviews. visits. Their improved understanding of donor See the Donor Information Resource Centre (DIRECT) at 5 operations has deeply influenced the way www.cgap.org/direct. 3 services for the poor. More generally, it raises sometimes fear that moving to the field may important questions about the role of the private erode, rather than strengthen, their technical sector in development. Microfinance is a private capacity, and often need to plan deliberately to sector activity that calls for significant technical retain their skills (staff at both Sida and SDC inputs, but is usually incompatible with large have taken this approach). budgets and direct government intervention.The program approach often pushes agencies to Moreover, program budgets are increasing in almost every development agency that was include credit components in large, multi-sector reviewed, while staffing levels remain frozen. programs. These components are often This situation places an additional burden on designed, implemented and supervised without staff, who feel greater pressure to disburse large appropriate microfinance expertise. amounts of money quickly. The lack of staff A number of donor agencies appear to believe resources risks producing large multi-sector that policy work does not require as much programs with insufficient technical attention to technical capacity as the support of retail-level the individual components. The overall trend programs. This assumption can lead donors to towards larger programs exacerbates this push too early for laws or regulations that are problem. ill-adapted to microfinance. The upstream focus also poses another trade-off. Staff can C. Decentralization lose their technical skills if policy work removes them too far from retail-level work. Several agencies, including DFID, GTZ, Yet some donor staff maintain that it is UNDP and USAID, are highly decentralized. precisely their ability to make concrete They delegate significant parts of the design, technical arguments based on direct knowledge monitoring and evaluation of development of current retail practice that gives them the projects to field offices. Most other donors credibility to influence policymakers. are rapidly moving in this direction. Decentralization enables agencies to design B. Move Toward More Generalist Staff programs that are more responsive to local needs, as well as to more closely monitor their The majority of staff in most donor agencies performance and use of funds. Agencies with are generalists. This is unsurprising, given low staff on the ground can also collaborate better incentives to specialize in a technical area. with other donors in the same country and Agencies are tackling an increasingly complex sector. and ambitious development agenda and they tend to reward staff with strong communication Managing a decentralized structure poses skills who can work on many issues and levels. several challenges, however. The more Staff in most agencies feel overwhelmed by the independent field offices become, the harder it proliferation of mandates. They must work at is to ensure that standards and accepted the retail level and policy level; coordinate practices are implemented across the board. both internally and with host governments, Managers of field offices also run the risk of other donors, the private sector and civil becoming more interested in maintaining society; and take into account cross-cutting positive relationships with local governments themes such as gender, HIV/AIDS, and the than upholding the good practice standards of environment. their own agencies - the flip side of responsiveness. The proliferation of mandates leaves staff stressed, with little time to update technical In addition to quality assurance and best skills or participate in knowledge networks. practice issues, knowledge management is Lack of time also prevents generalists from another important challenge in decentralized seeking specialist advice on the design of agencies. Good knowledge management microfinance programs, limiting the programs' requires two-way interaction: experiences from chance of success. The move towards generalist the field need to feed back into the knowledge staff is particularly acute at the field level, base of the agency, and field staff need access to where many of the best career advancement the knowledge of headquarters and other field opportunities are found. Technical staff now offices. 4 III. ELEMENTS OFAID where they want to go and align their behavior EFFECTIVENESS and operations to that vision. A coherent approach (rather than a splintered one) does not The 17 Microfinance Donor Peer Reviews stifle diversity and creativity, but rather defines yielded five core elements of aid effectiveness the boundaries of a common commitment to at the individual agency level. While not principles of good practice. A high-quality exhaustive, these elements help determine an microfinance policy is important, but not agency's comparative advantage in sufficient; policies must be internalized by staff microfinance vis-à-vis other donors when to translate into results on the ground. supporting financial services for the poor. Challenges Strategic Clarity: The coherence of an agency's vision of microfinance, and Unclear agency-wide vision of microfinance whether this vision and agency policies are Although agencies demonstrate remarkable in line with accepted standards of good clarity on their overarching development goals practice. (i.e., poverty reduction and the Millennium Strong Staff Capacity: Whether the focal Development Goals), the same is rarely true for unit has sufficient capacity and resources to microfinance. With few exceptions, there is a provide skilled technical support to dissonance in most agencies concerning the operational colleagues. Also, whether the definition of microfinance, and how it can overall level of technical capacity contribute to their broad development goals. throughout the agency is adequate to ensure Donor staff often understand microfinance to be quality operations. different things, and tend to define it in narrow Accountability for Results: The level of terms, for example as an input for agricultural knowledge of the microfinance portfolio production, a resource transfer to a specific (e.g., whether it is "visible" to the agency) target group, or part of a strategy for deepening and transparency on portfolio performance. the financial sector. Lack of a coherent agency- wide vision that explains how microfinance Relevant Knowledge Management: How contributes to core development goals can well the agency learns from its own and result in uneven project quality and conflicting others' experience through the creation, strategies. Most important, it can erode the dissemination and use of practical, user- impact of microfinance on poor people. friendly knowledge. Appropriate Instruments: Whether an Uncertainty about the role of the private sector agency has instruments at its disposal that in development work allow it to work directly with the private Private sector departments are a fairly recent sector - a critical pre-condition for phenomenon within donor agencies. The effectiveness in microfinance. The quality, majority of donor agencies remain range and flexibility of instruments are also uncomfortable working with the private and crucial. financial sectors. For many donor staff, financial sector development means working at For each of these five elements of effectiveness, the "high end" of the banking sector (e.g., with this section highlights current donor challenges the Ministry of Finance and Central Bank, and and presents recommendations from the Peer on bank restructuring) and preventing (or Reviews. It then describes some examples of cleaning up after) financial crises. The good donor practice that development agencies relatively few donors that have financial sector have put in place to improve their effectiveness. development departments often created them in the wake of the 1997 Asian financial crisis. A. Strategic Clarity Poverty Reduction Strategy Papers and the The coherence of an agency's vision of "program" approach to development, which microfinance, especially the relationship emphasize public sector budget support, further between microfinance operations and broader call into question exactly how private sector development goals, affects quality at every work like microfinance fits into the bigger level. Agencies with strategic clarity know picture of development assistance. 5 Inadequate internalization of microfinance Operationalize the vision statement policies Ensuring that a microfinance vision statement is Good microfinance policy is not enough. A understood and internalized by the entire clear policy that defines microfinance standards organization requires a creative approach. Top of good practice and agency goals in management should signal its commitment to microfinance is insufficient for effectiveness. the vision statement by making references to it Even the best policy has little value unless it is in key speeches and addresses to staff. internalized by the staff who design, implement Management should also commit to and appraise microfinance programs. Several disseminating the vision throughout agencies have developed policy or strategy headquarters and field offices. papers in line with good practice, but failed to make these policies relevant to the work of non- To help staff apply the vision to operational microfinance specialist staff. The proliferation work, the microfinance focal point within an of policies also creates "policy fatigue". As a agency should translate it into clear guidance on result, donor microfinance policies may not be specific operational issues. This guidance can understood, accepted or used by staff and good take the form of short notes or "dos and don'ts" practices are not systematically reflected in an that can be used by program managers and non- agency's microfinance operations. microfinance specialist staff in their everyday work. The Financial Sector Group of DFID, for example, is developing a series of notes to guide Recommendations and Good Practice the agency's operations and sharpen clarity on Craft a vision statement its microfinance objectives. A vision statement should lay out an agency's Embed microfinance organizationally within vision for microfinance in language appropriate financial sector and/or private sector for managers and non-microfinance specialists. development It should define microfinance, explain its role Microfinance requires a private sector approach within the financial sector, and describe how it to ensure that poor people have permanent contributes to the agency's development goals. access to financial services. Only financially The statement, which should be short, should sustainable institutions can provide on-going also explain how the agency intends to support social benefits to their clients.Afinancial sector financial services for the poor based on its perspective advocates appropriate roles for the comparative advantage. The process of key stakeholders in microfinance (i.e., the developing the statement is often more government, private sector, and civil society) important than the document itself. Using a and seeks to avoid introducing market participatory approach that consults a broad distortions. These are two important pre- range of staff is critical to ensure buy-in from requisites for building sustainable microfinance staff and management, so that the statement institutions. Technical guidance to microfinance becomes a reference document for the whole operations should therefore be the ultimate agency. In the Netherlands, the Ministry of responsibility of a financial sector (or private Development Cooperation and the members of sector) department, which would maintain the Dutch Microfinance Platform - a network of appropriate links to colleagues in relevant areas some ten private and public Dutch institutions such as social and rural development. that support microfinance - launched a process As part of its re-organization, AFD placed to define a shared vision statement for microfinance within its recently created microfinance. financial sector team. At Sida, microfinance A vision statement can also build on the policy is now located within private sector papers of other agencies. The Financial Sector development. To emphasize the importance of Development policies of SDC, DANIDA, and microfinance as part of private and financial the German Federal Ministry for Economic Co- sector development, AsDB shifted operation and Development (Bundesministerium responsibility for microfinance from the für wirtschaftliche Zusammenarbeit und Agriculture, Environment, and Natural Entwicklung, BMZ), for example, provide an Resources Division to the Governance, excellent basis for such statements. Finance and Trade Divisions. 6 B. Strong Staff Capacity Uneven technical inputs in the early design stage The Peer Reviews confirmed a direct link The provision of technical inputs in the early between staff with solid microfinance technical stages of project design is a strong precondition expertise and the quality of an agency's for quality projects. In most agencies, however, microfinance operations. Within donor microfinance specialists are not always aware of agencies, most microfinance programs are upcoming microfinance operations, especially managed by non-microfinance specialist staff, when financial services are a component of functionally splitting those with technical multi-sector projects and thus do not figure in expertise on the one hand, and those with the project name or coding systems. Generalist control over money on the other. staff typically do not have incentives to systematically seek technical inputs early in the Challenges project design stage. Such inputs are obtained primarily on a voluntary, ad-hoc basis. When Insufficient technical capacity among the staff specialists do become involved in projects, it is who design and implement programs often as part of a formal review process - far too Overall technical capacity in microfinance is late to make serious modifications and prevent low in the majority of donor agencies. Low major mistakes. Sadly, a badly designed technical capacity means that insufficient microfinance program or component (one with technical resources exist relative to the subsidized lending rates, for example) may not only be ineffective, but it may also distort the requirements of good microfinance practice. overall financial market. The scarcity of resources raises the question of how microfinance projects can be designed, Optimal role and organization of the backstopped and monitored by staff with microfinance focal point appropriate knowledge. The overall trend One of the key challenges for focal points is to toward generalist staff in most agencies makes properly prioritize their activities. Their ability this problem more acute and causes concern for to work effectively depends on the structure of future microfinance operations. Typical project their agency (centralized or de-centralized), managers work on diverse sectors and have their level of responsibility (technical support little time to attend training sessions in and/or portfolio management), the balance technical areas that represent 5-20 percent of between their internal and external activities their portfolios. Even when agencies organize (e.g., promoting good practice internally versus training events, dropout rates are high, participating in international fora), and their especially when such events are held in close incentives to engage non-specialist staff on proximity to the work place. microfinance issues. In many agencies, focal points do not spend Over-reliance on outsourced expertise enough time spreading best practices within Many donor agencies rely extensively on headquarters and field offices, preferring to external consultants, who often design, launch their own projects. Working with non- implement and monitor microfinance programs. microfinance specialists who may be skeptical, Unfortunately, outsourced expertise is not a sometimes even hostile, can be unrewarding.As substitute for internal staff capacity. Experience a result, focal points are often more reactive shows that excessive use of external consultants than proactive, working only with the most can prevent agencies from deepening their interested and open colleagues who approach institutional knowledge, learning from them. experience and innovating. This problem is especially serious when agencies repeatedly use Recommendations and Good Practice a limited pool of consultants without sufficient competition, quality control or performance Invest in full-time microfinance technical staff reviews.Also, those who manage contracts with The four most effective agencies among the 17 consultants or operators often lack the baseline that were reviewed - DFID, GTZ, KfW and knowledge needed to judge their performance. USAID - have strong technical focal points. 7 Beyond the focal point, staff have a solid basic should also establish consultant rosters that track knowledge of microfinance principles even individuals' performance, while seeking to though they work in this area only a small continuously identify fresh sources of expertise. proportion of their time. In small bilateral agencies, even one microfinance advisor can Offer tailored training to generalists working bring about significant change in a relatively on microfinance short period of time. The focal points at Sida Agencies can significantly improve and NORAD, for example, have had a big microfinance knowledge by developing a impact on non-microfinance specialists in their minimum level of technical capacity among agencies. program or regional officers with a microfinance portfolio. The purpose of this Grouping some or all microfinance specialists in baseline capacity is to make non-microfinance one unit may be advantageous to build cohesion, specialists informed consumers of microfinance credibility and an agency-wide vision for technical expertise, able to seek advice at the financial services for the poor. An alternative right time. Training materials and formats approach is to place specialists closer to should take into account the time constraints of operational staff. AsDB, for example, recently busy managers, agencies' priority concerns and hired new staff with significant microfinance the participants' current level of microfinance knowledge in regional departments, and a knowledge. In addition to training for non- financial sector specialist for its technical microfinance operational staff, UNCDF offers advisory unit. DFID combines a strong central UNDP Deputy Resident Representatives technical unit with three full time equivalent customized training opportunities to become experts in the newly created Financial Sector conversant in key technical and policy issues in Team with financial specialists located in microfinance. strategic countries in the field. In Uganda, microfinance practitioners cited the high number Create incentives for increased knowledge of technically qualified donor staff in the exchange between specialist and generalist country as a significant contribution to the staff overall development of the microfinance sector. Management should make knowledge exchange Increase access to technical expertise a part of the work of all staff. Incentives need to Hiring additional headquarter or core staff is not run in two directions: the focal point must have always financially or politically feasible. Options an incentive to engage non-microfinance to increase access to microfinance expertise specialists, and program managers must see the without increasing overall headcount include benefits of seeking technical advice from reassigning staff with microfinance expertise; microfinance experts. At KfW, technical recruiting national specialists in the field; specialists are motivated to support colleagues concentrating technical resources on countries throughout the organization because this with the largest microfinance portfolios; placing function is embedded in their TORs and a team of experts on retainer for technical workplans, and team leaders from other regions troubleshooting; and signing contracts with local comment on their annual performance or regional service providers. Recruiting and evaluations. Knowledge exchange between training national microfinance specialists not microfinance specialists and non-specialist only builds local capacity, but it also provides a program staff should become a systematic sustainable and cost-effective source of technical part of all TORs and annual reviews. support in-country. Management should accordingly reward focal units that pro-actively cultivate technical To strengthen its technical monitoring capacity, relationships with operational staff. IFAD is now contracting specialists based in Management should also encourage non- Africa and Central America to provide technical microfinance specialists to call upon specialist support to its field projects.When outsourcing to input during the development stage of a new consultants, it is imperative to create feedback microfinance project. The focal point can assist loops to integrate their learning into the this process by disseminating a list of technical knowledge base of the agency. Focal points specialists (both within and outside of the 8 agency) who can help non-microfinance C. Accountability for Results specialists. Other incentives include offering Accountability refers to full transparency generalist staff scholarships to international regarding the purpose, content and performance training events and highlighting success stories of the microfinance portfolio. It also refers to an of their programs in widely-read agency agency's responsibility for the efficient and publications. effective use of its funds (often those of Refine the role of the microfinance focal point constituent taxpayers). Transparency about The experience of the Peer Reviews strongly performance of microfinance programs is suggests that any agency interested in directly critical for aid effectiveness. Only with accurate supporting microfinance needs a technical focal information can agencies make sound decisions point. Focal points provide an effective entry- on whether to continue, extend, terminate or point for technical exchange and dissemination replicate a program. Yet, the Peer Reviews within donor agencies. While there is no single found that most of the agencies that were approach, the Peer Reviews indicate that focal reviewed do not know how much money they units that prioritize spreading good practices have invested in microfinance, nor do they have among non-specialist colleagues at sufficient knowledge of the performance of headquarters and in the field may be more their microfinance operations. effective. This is especially true in agencies where microfinance projects originate from Challenges many different departments and from decentralized country offices. In response to a Significant approval pressure recommendation in its letter to management, Pressure to move money, often within a the Board of Directors of AfDB reshaped the designated fiscal year or project approval cycle, mandate, staffing and business plan of its is present in every donor agency. It is especially microfinance focal point. Its new Central acute in multilateral agencies. The imperative to Microfinance Unit now spends most of its time get projects approved often takes precedence supporting colleagues instead of implementing over setting up systems to ensure its own programs. accountability, overrides technical discipline, and leads to the distortion of immature financial Regardless of the type of donor agency, it is markets. Even when technical staff point out essential that focal points: flaws in project design, project approval ·provide technical expertise in the early deadlines can take priority over modifications. stages of project design, both for stand-alone This pressure, observed during the Mali field microfinance projects and financial sector visit, pushes staff to design larger programs, components within larger programs; often with no regard to the absorptive capacity ·facilitate networking and knowledge of target markets and clients.Approval pressure sharing among staff working on has particularly serious effects on private sector microfinance by disseminating information, activities like microfinance because good promoting dialogue and offering in-house projects typically require small budgets but workshops and training; and large technical inputs. It can be both difficult ·work to establish strategic clarity within and harmful to move large amounts of money in their agencies on microfinance and how it microfinance. contributes to achieving overall development goals. Invisibility of the microfinance portfolio Microfinance projects often originate in Focal points need to balance what they often numerous departments; no one person or unit is perceive as more interesting work (e.g., responsible for centralizing funding decisions. launching and managing their own projects, Lack of a coherent agency-wide vision of networking with internal and external microfinance, moreover, can mean that microfinance specialists, attending international community development funds or other types of conferences), with the critical but possibly less revolving credit funds may not be considered intellectually stimulating role of spreading good microfinance. Finally, internal project coding microfinance practices within their agencies. systems often cannot flag microfinance when it 9 is a minority component of a larger project (and larger programs should be analyzed carefully by does not appear in the project title). The overall technical specialists prior to approval. A focus lack of visibility of the microfinance portfolio on quality may require a change in policy or prevents agencies from providing appropriate procedures. For example, AFD's top technical support to these programs. It also management recently decided that microfinance makes learning from successes and failures projects no longer have to comply with the impossible, increasing the probability that the required average size of projects for the agency will repeat the same mistakes. organization as a whole, allowing them to proceed as smaller operations. Lack of performance tracking With many agencies uninformed about the Obtain basic information on the portfolio scope and size of their microfinance portfolios, Strategies to improve quality and results should it follows that they have insufficient knowledge be based on knowledge of the existing portfolio, of the performance of their microfinance including all credit components, funds and operations. Indeed, nearly all the agencies that credit lines. Agencies should modify their were reviewed did not adequately track the current monitoring systems to flag and track all performance of their microfinance investments. projects with financial services, even when they Even when collected, reporting information are a minority component of a larger project. In tends to be activity-based (amount disbursed, preparation for the Peer Reviews, many donors number of training events, etc.) rather than compiled aggregate portfolio information for performance-based (e.g., health of financial the first time. Although the task is difficult, intermediaries, client satisfaction). agencies should continue the process and aim for progressive improvements in the quantity Few agencies conduct systematic external and quality of information collected. For evaluations of their microfinance initiatives, example, as part of the follow-up to its Peer which prevents them from making appropriate Review, UNDP launched a portfolio review of management decisions based on lessons its field-level operations. learned. As a consequence, ineffective projects or project components that distort local markets Develop a performance measurement and waste development money persist and are framework sometimes even renewed, while highly Agencies urgently need to collect basic performing programs do not receive the information on the performance of their recognition they deserve. Finally, most agencies microfinance programs. For example, do not report the results of their microfinance information on the number of programs externally, and thus cannot compare borrowers/depositors, loan portfolio quality and their performance with that of other agencies. financial sustainability should be routinely At a time when several agency leaders are recorded in annual program reports. Agencies promoting results-based management, should also systematically integrate such microfinance provides a clear example of a indicators in program proposals, contractual agreements, terms of reference, and monitoring sector where performance should and can be and evaluation documents. Among the donors more systematically measured and further that were reviewed, USAID systematically utilized for management decisions. collects the most basic information on its portfolio via its Microenterprise Results Recommendations and Good Practice Reporting (MRR) system. Enlist top management to combat approval Microfinance is an area of development for pressure which accepted indicators of performance have Developing a culture of quality programs in already been established. When possible, donor agencies requires a clear message from performance measurement frameworks should the top. While difficult to implement, top be harmonized among donors and the actual agency officials and executive boards should performance of each agency's portfolio align incentives to reduce approval pressure and compared with internationally accepted reward good performance. With respect to benchmarks. To accomplish this task, agencies quality microfinance, the use of credit lines in can use the Microfinance Information 10 eXchange (MIX), an internet-based information D. Relevant Knowledge Management platform for sharing information on Knowledge Management (KM) - the creation, microfinance performance. Program managers dissemination and utilization of knowledge - is can ask partners to report performance about transforming information into usable information directly to the MIX. IFAD and the knowledge and ensuring that it reaches the right Dutch Microfinance Platform have recently people at the right time. When knowledge decided to use the MIX for project reporting. management enables agencies to learn from The MIX team is preparing to train staff from their own and others' experience, it greatly both groups to use the platform and to help contributes to effectiveness. them design a pilot test. Harmonized reporting reduces the administrative burden on Challenges microfinance institutions. In Uganda, for example, 15 donor agencies (including AfDB, Lack of systems to capture and use internal DFID, EC, NORAD and USAID) have and external knowledge developed a single Performance Monitoring Although the majority of agencies have Tool (PMT) that their Ugandan partners can use informal networks, systematic cross- for all donor reporting. fertilization of ideas within and among regional and sectoral divisions rarely occurs. Flows of Introduce performance-based contracts. information between field operations and head Agencies need tools to hold their microfinance office technical units are also weak. The lack of partners and contractors accountable for their a KM system is particularly acute when KM is results. Relationships at all levels and with all only one part of the responsibility of technical partners (apexes, microfinance institutions, staff in a given department. A single person or technical implementers) should be spelled out department cannot engage unilaterally in in performance-based contracts, based on a knowledge management. The absence of clear clear definition of the ultimate project goal and roles and incentives for the exchange of a coherent exit strategy for the donor. knowledge inhibits institutional learning in Performance milestones with clearly defined microfinance and prevents agencies from targets could be used to determine if additional adapting new programs based on previous funding would be released. NORAD, for successes and failures. example, started using performance-based contracts with PRIDE in Uganda. When using Lack of exchanges in the field such contracts, relevant staff must be trained to In many of the agencies that were reviewed, there are no mechanisms that facilitate interpret and act on monitoring reports. If communications among countries so that partners fail to meet targets without providing lessons learned and success stories can be adequate explanation, managers must be shared.Agency staff are often not aware of their empowered to stop further funding. own agency's innovations and often do not Use incentives to increase staff accountability. communicate with one another within the same Systems for accountability will not work unless organization. This isolation is particularly problematic for agencies that are highly staff is motivated to use them. Management decentralized. should consider introducing incentives to promote transparency and good performance in Unsuitable packaging of information microfinance. Positive incentives could include A key challenge of knowledge dissemination is priority access to training and conference to repackage the burgeoning volume of internal opportunities, awards for successful and external microfinance information into a microfinance operations, internal publicity on more digestible form. Though an important the intranet, and even monetary incentives. component of knowledge management, GTZ, for example, has financial and non- research does not always translate into financial incentives to reward good staff improved practices on the ground. Staff feel performance. Agencies that truly link annual bombarded by too much information that is not performance evaluations and promotions to directly relevant to their daily work. quality work encourage staff to do their best. Overstretched donor staff require brief, 11 operational technical knowledge accessible discuss "hot issues", specific projects, or even a when they need it: "just in time," not "just in new strategy for microfinance. IFAD, AsDB, case". and EC have thematic groups composed of staff from various departments that reinforce the Recommendations and Good Practice focal point and help transmit key messages more deeply within the agencies. The EC focal Make knowledge management a responsibility point, for example, worked closely with the of all staff Sub-Thematic Group on Microfinance to draft a KM is not limited to disseminating information. work plan to implement its Peer Review It must become an ingrained operational habit recommendations. of all agencies. In headquarters and in the field, Agencies should make efforts to integrate field staff should share useful information with staff into such networks because they are often colleagues as an automatic reflex. To do so, the repository of institutional knowledge in however, they need appropriate incentives and individual countries. Local staff also have their tools. own informal networks and can offer insight Internally, effective KM requires a clear into the local context. signal from top management about its importance. Managers should allocate staff Top management should ensure that time and time and budget resources for meaningful financial resources are available to promote these KM. They should also include KM as an networks more formally. GTZ, for example, has explicit function in staff job descriptions, allocated significant resources to build up strong annual work plans and performance regional sector networks, composed of evaluations. For microfinance focal points, specialists from the field and head office, which KM is the core of their mission and a large meet regularly. By transforming KM into a proportion of their time should be dedicated personal and joint staff objective, GTZ to it. Internal knowledge networks (such as succeeded in creating a real culture of intellectual the Financial Services Team and the Savings exchange and shared responsibility for building and Credit Forum) enable SDC to exchange, knowledge throughout the organization. disseminate and retain knowledge within the Develop user-friendly KM tools to exchange organization. knowledge and lessons learned Externally, agencies should exchange more Ultimately, success depends on whether knowledge with other donors and partners knowledge is applied to problem solving and through their focal points. They should also decision making. KM works when staff learn disseminate key internal publications more from internal and external experiences and feed widely. Such exchanges could occur through that knowledge back into the design of new different vehicles, such as donor working initiatives. Focal points should gather, groups, CGAP annual meetings, staff synthesize and re-package available secondments and international conferences. information about good donor practices in a USAID has launched a series of research form accessible to both specialists and non- programs that have produced significant microfinance specialists. They should also knowledge and have become public goods experiment with a variety of media to for the international community, including disseminate information as widely as possible. other donors. There is a real thirst for practical, operational Build internal specialist networks guidelines on microfinance. Agencies are Many of the agencies reviewed have staff with encouraged to develop short, 2-3 page some knowledge and/or interest in documents that outline the most effective ways microfinance. In some cases, they have formed to tackle specific challenges in supporting informal networks that meet periodically and financial services for the poor. UNDP, for exchange e-mails to brainstorm ideas, find example, has begun to write short "how to" solutions to problems, and share lessons briefs on microfinance topics of relevance to learned. A collegial atmosphere and informal project staff, such as microfinance and meetings provide important opportunities to HIV/AIDS, gender, and post-conflict situations. 12 E. Appropriate Instruments Inappropriate use of instruments Even when agencies can work directly with Awide range of funding instruments is required private sector entities, they do not always use to support microfinance well. These the instruments at their disposal to successfully instruments include grants, loans, loan build permanent access to financial services for guarantees and equity participation, and are poor people. Common problems include used to build institutional capacity, provide excessive funding of large credit lines that technical assistance, fund lines of credit, cannot be disbursed safely and distort local facilitate the access of financial institutions to markets; rigid promotion of markets and local capital, bolster equity, launch policy products that reflect donor priorities instead of initiatives and build financial infrastructure those of clients; slow procedures that cause (such as credit rating agencies and auditors). liquidity crises in financial intermediaries Effective donor instruments in microfinance waiting for disbursements; lack of proper accommodate small projects focused primarily sequencing of instruments (e.g., using debt on strengthening private sector institutions. All instruments for start-up technical assistance); instruments should be used flexibly, with continual funding without concern for disbursements linked to the attainment of clear performance; and lack of risk-taking. performance goals. Poor performance of credit components A significant portion of donor microfinance Challenges funding takes the form of credit components within multi-sector projects. These components Inability to work directly with the private can be grants or loans and have different names sector or civil society in various agencies like credit lines, community Many donors are constrained to work directly funds, or revolving funds. These components with government entities. This problem is rarely adhere to the principles of good especially relevant for multilateral development microfinance practice, nor do they easily adapt banks, the largest public-sector funders in themselves to local demand and absorptive microfinance. Unfortunately, their main capacity. Those who design multi-sector instrument - loans to governments - is not projects frequently assume credit to be a consistent with good microfinance practice. binding constraint to meeting the development Experience has shown that governments should objectives of the overall project, but this is not not be directly involved in the delivery of always true. From their vantage point, credit is financial services or the management of seen more as a resource transfer to a specific microfinance initiatives. Government ministries group than as a tool for building permanent and project management units usually lack the access to financial services. Offering credit in technical skills and political independence this manner can induce poor clients to invest in needed to manage microfinance projects. Also, inappropriate activities, contribute to their governments are often understandably reluctant indebtedness, distort financial markets, and to take loans for small technical assistance encourage corruption. Credit components often projects, even though such assistance is vital to languish undisbursed in apex funding facilities, support permanent access to financial services have little lasting impact and decapitalize over for the poor. The more appropriate role for time. They are unsustainable and tend to governments would be to help create a disappear after the end of a project. supportive policy environment that allows the private and financial sectors, including Recommendations and Good Practice microfinance, to function properly. Take a private sector approach There are, of course, exceptions to this rule. A Whether working directly with the private or few state banks and apex funding facilities have public sector, donors should complement managed to protect microfinance activities from private capital, not displace it. Instruments political interference by creating a firewall should be structured to enable the selection of between them and other subsidized government specialized implementing partners rather than programs. to design credit schemes from scratch. Such an 13 approach requires a clear exit strategy to make KfW employs a range of instruments in sure that subsidies are temporary and that donor microfinance, and its purchase of the German funding leaves behind institutions that can Investment and Development Company (DEG) continue to provide services beyond the life of in 2001 provides greater flexibility to make the project. It also implies that donors should equity investments in financial intermediaries. seek risky but promising opportunities that This equity instrument has proved critical in would not immediately attract private investors. KfW's successful "Greenfield" strategy of In fact, this type of risk-taking should be the supporting start-ups in Eastern Europe and the hallmark of public vis-à-vis private capital in Balkans. In the Netherlands, the Ministry of microfinance. Among the agencies that were Development Cooperation can leverage a wide reviewed, USAID has both a strong capacity range of funding instruments through the Dutch and history of working successfully with the Microfinance Platform. These instruments private sector. allow the Netherlands to support many types of institutions that reach a diverse range of clients. Even though it works mostly with loans to When donors do not have a wide range of governments, IFAD managed to avoid many of available instruments, they should partner with the common pitfalls by working with an others that have complementary instruments to existing financial institution in Armenia, and leverage each others' strengths and improve establishing clear selection and performance their overall effectiveness. criteria. The project also enabled the government to blend grants and commercially- Phase out credit components unless they priced loans to ensure sufficient revenues to conform to good practice repay the IFAD loan. Whenever feasible, financial services for the poor should not be included as minority Match funding instruments to sectoral needs components of multi-sector projects, but be Insufficient retail-level capacity remains the stand-alone projects. Microfinance specialists number one constraint to building pro-poor should collaborate closely with colleagues in financial systems. Donors should continue to other sectors and departments to avoid inclusion concentrate their support on building retail-level capacity. Relative to other development sectors of credit lines in programs that do not receive like education, health or infrastructure, sufficient technical supervision. Following its microfinance requires small projects with Peer Review, the EC's top management decided intensive technical inputs, but relatively modest to cease funding new credit lines that often budgets. These programs need flexible, patient distort markets and have limited impact on the funding over a significant period of time. CIDA, poor. for example, has used grant funding to support retail-level institutions for the past 35 years, IV. IMPLICATIONS FOR THE FUTURE: contributing to the development of important NEXT STEPS microfinance providers in West Africa. The flexibility to respond quickly to a promising Donor agencies have invested a great deal of opportunity can also be essential to a donor's time and energy in completing these reviews, ability to support microfinance. DANIDA, for achieving some remarkable progress. But example, retains unallocated funds in its serious challenges remain: much donor funding program budgets, giving the agency notable of microfinance remains ineffective and does funding flexibility. not adhere to accepted principles of good practice. Donors wishing to contribute Exploit the range of existing instruments more effectively to microfinance should achieve fully minimum competency in each of the five Agencies should more fully exploit their elements of effectiveness to ensure adherence to existing instruments by matching and basic standards of good practice. sequencing them to the specific needs of different institutions and markets. For younger This section suggests ways in which the donor institutions and start-ups, for example, a grant community can retain the momentum generated might be more appropriate than a guarantee, by the Peer Reviews to enhance the concessional loan, or equity participation. development impact of microfinance funding, 14 both at the individual agency level and as a two areas: (i) a requirement to consult with community of donors. Specifically, donors need government, all other donors, and to build on management commitment to stakeholders before approving any new implement the Peer Review recommendations. support in a specific country or with specific In addition, each agency is encouraged to institutions to ensure complementarity and further define its unique contribution to avoid undermining others in the market; and promoting financial services for the poor and act (ii) accountability and transparency on in accordance with this comparative advantage, performance of the portfolio are more both globally and in specific countries. Donor important than "looking good"; and agencies are also urged to collaborate in ways transparency is critical to reaching the shared that leverage each others' comparative vision of creating sustainable access to advantage. Finally, it seems worthwhile for financial services for poor and low-income donor agencies to jointly tackle several common people. challenges that were identified in the Peer 2. Share and leverage staff capacity and Reviews. knowledge. Agency leaders concur that a A. Build on High-level Commitment strong internal technical capacity is essential to manage or outsource microfinance With the active involvement of heads of operations. However, all agencies cannot and agencies and ministers, the Peer Reviews should not make equally intensive created an exciting momentum for reform and investments in building staff capacity and improved aid effectiveness. The reviews knowledge management systems. Therefore, demonstrated that many of the challenges faced they should seek to leverage and build on by agencies are not only technical, but often their technical capacity and knowledge by structural and organizational. Solutions require encouraging cross-agency secondments, the firm support and commitment of top drawing on expertise in the private sector, leadership. Ultimately, success will be investing in their national staff, delegating determined by the extent to which political programs to those agencies with strong commitments translate into changes in technical staff capacity (especially when that organizational culture, behavior and the quality technical capacity is decentralized) where of field operations. appropriate, strengthening and scaling-up networks, engaging in joint training, and The February 2004 meeting in Paris, building and contributing to common Leveraging our Comparative Advantage to knowledge management systems like an Improve Aid Effectiveness, provided the internet portal. leadership of the 17 participating agencies with an excellent opportunity to reflect together on 3. Take the Peer Review process and how to improve aid effectiveness and assure recommendations to the field. Building on mutual accountability for change. Together, the the decentralized structure of many agencies, 17 agencies committed themselves to take the the Peer Reviews should increase the following additional steps: ownership, voice and participation of colleagues, partners and stakeholders 1. Codify good practices. Current joint (government and private organizations) at the guidelines of good practices are nearly country level. Activities in specific partner 10 years old, and require updating, both to countries should be undertaken to a) obtain incorporate the lessons from the Peer the feedback of field-level stakeholders Reviews and to make them easier to apply to beyond the donor community; and b) test and operations. New guidelines should include, document cases of collaboration among among other things, a code of conduct for donors with complementary strengths. using subsidies to work with the private sector and guidance on the best use of 4. Conduct two-year follow-up. In two years' different instruments available to bilateral time, agencies plan to reconvene to discuss and multilateral donor agencies. Agency which steps they are taking, individually and leaders commit to sending clear, strong collectively, to implement the Peer Review messages to all operational staff in at least recommendations. Each agency should 15 assess and track progress towards the GTZ can also effectively provide hands-on recommendations of its Peer Review. As support to those who implement key part of the follow up, agencies could choose government policies, e.g., bank supervisors. to undergo a voluntary "checkup" review. · NORAD is a small bilateral donor with These lighter reviews should explicitly grant funds and limited technical staff, incorporate performance benchmarking. especially at the embassy level. Its Microfinance Position Paper outlines a B. Identify and Act on Comparative strategy that leverages its grants by focusing Advantage on relatively high risk innovations and Building financial systems that work for the industry infrastructure programs and poor - the majority of the world's population - is working through Norwegian NGOs. The a daunting task. Today, demand far exceeds agency plans to only fund individual MFIs in close cooperation with other donors. supply for financial services, and market failures continue to block poor people's access. · Both KfW and AFD have diverse banking Continued donor support of the sector remains instruments that allow them to work with a vital. The range of required donor engagements rangeoffinancialinstitutions-primarilyloans, encompass working with diverse types of loan guarantees, and equity participation. financial intermediaries (e.g., banks, However, they have limited grant funding cooperatives, postal systems), engaging in available for technical assistance, and financial policy dialogue with governments and other disincentivestolaunchsmallcapacity-building stakeholders, and helping to build industry projects. These agencies could fruitfully infrastructure. At the same time, not every partner with others that have flexible grant agency can or should work on all these different funding to broaden the range of support they levels. can offer to partners. · ILO's tripartite governance structure Donors can use the five core elements of (which includes governments, workers, and effectiveness as one input to identify their industry) could offer the agency a comparative advantage in promoting financial comparative advantage in constituency- services for the poor. Combined with other based work, such as supporting workers' agency-specific considerations, these elements banks, providing social protection through can help guide donor actions in a given country microinsurance, and generating employment context and/or type of intervention. For through small enterprise development. example, decentralized decision-making and technical expertise is an important success Analysis of comparative advantage can guide factor for microfinance operations that require agencies to determine their optimal level of constant dialogue and technical support, involvement in microfinance. Some possible especially policy work. Similarly, a long track action scenarios include: record in a particular country or region can be Expand: The agency makes microfinance a critical for credibility and give an agency a local strategic priority. It invests significantly in comparative advantage. developing an agency-wide vision and strategy, technical staff capacity, and systems The Peer Reviews highlighted potential for accountability and knowledge opportunities for several agencies to align their management. operations with their comparative advantage, Consolidate: The agency decides to retain for example: the same volume of microfinance spending · GTZ's strengths include a cadre of in-house and specialize in particular niche markets technical specialists, a sophisticated (geographical or technical) where it has a knowledge management strategy, efficient comparative advantage. The concentration of regional microfinance staff networks, and a its portfolio yields greater impact for the long history of involvement in microfinance. same amount of funding. These strengths make it an ideal organization Delegate: The agency decides that it has a to pursue highly specialized technical work limited comparative advantage, but wishes to to support financial intermediaries in areas remain involved in microfinance. It forges like rural finance and savings mobilization. co-funding or other types of agreements 16 where the design, implementation, vision, harmonization of procedures, and a monitoring and evaluation of microfinance professionally-managed trust mechanism to projects are delegated to an agency with a implement capacity-building projects, mainly clear comparative advantage in pro-poor with financial intermediaries. The Southeastern financial sector work. European Funds represent another example of Phase out: Based on its limited or non- this kind of collaboration. In recognition of its existent comparative advantage, the agency comparative advantage in technical expertise, decides to stop developing new experience with banking instruments, and microfinance operations and winds down its knowledge of financial intermediaries in the existing portfolio. Resources previously region, KfW manages these funds on behalf of used for microfinance are reassigned to other multiple donors, including the EC, BMZ, SDC, development sectors where the agency can the Austrian government, and the Netherlands be more effective. Development Finance Company (FMO). C. Collaborate According to Comparative D. Develop a Joint Agenda Advantage Donor agencies could benefit from common As donor agencies identify and act on their solutions for maximizing their effectiveness in comparative advantages, they can also build on microfinance. Three concrete examples of one another's strengths to form operational mutual challenges are: alliances. Collaboration makes possible the Joint standards. The most recent donor consistent application of good practice guidelines for microfinance ("Guiding standards, a greater range of funding Principles for Selecting and Supporting instruments and partners, and reduced Intermediaries" or the "Pink Book") were transactions costs - enabling donors to attain far written in 1995. Donor practices have more impact together than any single donor evolved since then and the time is right to could achieve alone. update them, drawing on lessons learned from the Peer Reviews. Options for this kind of collaboration range Rural finance. Seventy-five percent of the along a wide spectrum. At one end, individual world's 1.2 billion extremely poor people donors can agree on a common strategy for live in rural areas. Most do not have access working in a particular country. Each agency can then engage with specific financial system to formal financial services. Donor agencies stakeholders based on its own strengths. At the struggle with the problem of adapting good other end of the spectrum, donors can pool practices to support rural financial services resources and conduct joint programming with in areas that are not particularly conducive to harmonized procedures and one voice. Many sustainable financial service providers. other collaborative approaches lie in between. Agencies could benefit from sharing Regardless of the model chosen, preliminary resources and experiences to tackle this experience suggests that the key to success of problem together. true collaboration is a clearly articulated vision Harmonization. As in other areas of that is shared by all donors. development, harmonization of procedures, systems and reporting would help increase An example of good collaborative practice is donor efficiency. Unlike other sectors, the multi-donor Pro-poor Financial Sector agreed standards of reporting on Deepening Program (FSD Program) in microfinance performance have already Tanzania, where four donors pooled funds to been established. Donors can build on support the expansion of financial services to existing common reporting formats, such as poor people. The FSD program, led by DFID the multi-donor PMT in Uganda and the and including CIDA, Sida and the Royal internet-based MIX Market, to more fully Netherlands Embassy, is built on a common harmonize their reporting requirements. 17 AID EFFECTIVENESS Authors: Eric Duflos Brigit Helms Alexia Latortue Hannah Siedek 1818 H Street, NW CGAP Paris Office Q4-400 66, avenue d'Iena Washington, DC, 20433 USA 75116 Paris, France The Consultative Group to Assist the Poor Tel: +1 202 473 9594 Tel: +33 1 40 69 32 73 www.cgap.org Fax: +1 202 522 3744 Fax: +33 1 47 23 74 36