Archive for: Donors and Investors

2011 has been a good year for aid transparency. At the 4^th High Level Forum on Aid Effectiveness in Busan, Korea, the international development community endorsed “transparency and accountability” as one of the shared principles of international development cooperation. And on words followed actions: during and following the Busan High Level Forum Canadian CIDA, the Inter-American Development Bank, the United States, CDC and UN Capital Development Fund (UNCDF) joined the International Aid Transparency Initiative (IATI), a multi-stakeholder initiative that develops international standards and guidelines for publishing information about aid spending. Read the rest of this page »

A lack of good corporate governance lies at the heart of some of the recent failures in microfinance. This is the conclusion of an excellent publication that analyzes 10 cases of “fracasos,” or failures, of microfinance  institutions in Latin America. While the analysis of the 10 cases points at several causes for failure, such as methodological deficiencies in credit technology, systemic fraud, uncontrolled growth, loss of focus, inappropriate concept design and state intervention, it suggests that with stronger governance these institutions may have had a better chance at surviving their crises.

Governance defined broadly is the system of people and processes that keep an organization on track and makes major decisions. Governing bodies  define and uphold the organization’s goals and mission, guide major strategic directions, manage risks, maintain an organization’s health over time, and ensure accountability throughout the organization. Some key pillars of good governance include risk assessment and management, internal control systems, ethics and fraud prevention strategy, and transparency and trust.

At a workshop on governance, hosted by Calmeadow, Promifin, and Academia de Centroamerica, donors and investors recognized that they were partly to blame as they continue to fund some organizations despite their lack of good corporate governance. Faced with reputation and credit risks, donors and investors are now more concerned than ever about corporate governance. At the workshop, several funders including IFC and the Swiss agency SDC, as well as major investors such as Blue Orchard, responAbility and Triodos, agreed to put more emphasis on good governance in their due diligence and monitoring of the MFIs they fund. Together with raters they are interested in coming up with practical and meaningful benchmarks to measure good governance.  Promifin in Central America already developed a technical tool to assess MFI’s corporate governance and offers guidance for improvement. Meanwhile the analysis on Latin American MFI failures focuses on the nuanced situation faced by institutions in that region and draws lessons from which to learn moving forward. I strongly believe good corporate governance is a key issue for microfinance across the globe. Only last week the Governor of the Central Bank of West Africa, BCEAO, commented  that “decentralised financial systems are characterised by a deficit of good governance, a catastrophic management, …shortcomings and incompetences of managers.”

So what can funders do about it?

Incentivize good behavior: Funders can signal the importance of good governance and create incentives for MFIs that adhere to good practice or negative consequences for those that do not, e.g. price increases or withdrawal. Grant funders can make payments based on performance on targets related to improvements in governance. Equity investors have a key role to play in the boards of MFIs. Collective action is key; individual funders cannot succeed in doing this alone.

Put theory into practice: As far back as 2005, the Council for Microfinance Equity Funds  produced a set of guidelines for implementing good corporate governance in microfinance institutions. Equity investors should apply CMEF guidelines in their investments and raise the issue in boards.

Build capacity: Good governance is central to institutional strengthening efforts and should be integrated with ongoing technical assistance and training initiatives. Building good corporate governance is a continuous process that requires a long term vision. Peer learning is also important.

Please share with us your ideas on how to advance good corporate governance across the industry.

–Antonique Koning

A couple of interesting nuggets from the Global Investment Congress in New York last week: first, as my colleagues Xavier Reille and Jasmina Glisovic-Mezieres have highlighted in a recent Web article, microfinance investment vehicles are currently over-liquid. It’s quite a reversal from just a year ago, when in the context of the spreading financial crisis, the concern was lack of liquidity. Today instead the issue for the funds is placing money. Indeed, responsAbility just  announced that it has temporarily suspended new subscriptions to its Global Microfinance Fund in order to reduce the share of liquid assets from 30 percent to 10 percent of the fund volume. (The plea from the microfinance networks was to reach down to Tier II and Tier III MFIs, but as Ann Miles of BlueOrchard pointed out, that’s easier said than done: “We’d love to go deeper in the market and invest in Tier IIs and Tier IIIs,” she said, “But as fund managers wearing our fiduciary hat, we can’t do that. We need investors who are prepared to take more risks…”)

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In a conference at New York University on the Best and Worst of Aid, Bill Easterly mimicked the Oscars, with awards for the best and worst development projects and ideas that readers of his AidWatch blog have nominated.  UNDP got the award for the leading multi-lateral in a “non-supporting” role, based on its alleged lack of transparency and bloated 129% administrative overhead.  Greece won the award for leading bi-lateral in a non-supporting role, for placing $1 million or less in a large number of countries—reportedly 130 of the 160 developing countries.  Hillary Clinton’s 3Ds approach, linking development, defense, and diplomacy, won the “worst idea in development” award. On the positive side, Easterly recognized DFID and the Global Fund as agencies with better practices.

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This is one of those one million dollar questions present at many microfinance forums. A CGAP and JPMorgan report on equity valuation in microfinance in the context of the financial crisis is shedding new light on this debate. Based on our admittedly limited dataset of 21 private equity transactions, MFIs in India are trading at 5.9 their historical book value or close to 3 times the world average. So, are MFIs in India overvalued?

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In a Greek myth the character Icarus escapes from confinement on the ancient Island of Crete by flying to his freedom using wings made of an ingenious mixture of wax and feathers. In the euphoria of his own escape Icarus drifts too close to the sun melting the wax of his wings. He plummets to the sea. One wonders if microfinance at times flies too close to the sun too?

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In a recent mission to Peru to review ways that MFIs measure client poverty, a manager told us “I think we have overestimated the percentage of poor clients we were serving”.

MFIs with a social mission or interested in capturing socially-responsible investment have been using a range of tools: poverty mapping, focus groups, wealth ranking, scorecards, and household surveys. These tools, when applied by qualified, rigorous monitoring and research teams, can be an excellent source of information to reorient operational targets and innovate with products that respond to clients’ needs.

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Despite the global crisis there is no shortage of capital for microfinance institutions.  The latest CGAP funder survey shows that donors and investors disbursed $3 billion in 2008, an increase of nearly 20% from 2007. Donors and investors participating in a recent European funders meeting reported maintaining or increasing their funding commitments for microfinance in 2009.  Political interest for microfinance remains high, especially following commitments made by the G20.

The question is if more funding is going to make things better.

Some people may argue that funders have contributed to a situation of uncontrolled growth in microfinance markets like in Nicaragua, Bosnia, and Morocco. A lack of coordination and concentration of funding with a limited number of institutions may have aggravated it in some cases. Are funders to blame for flooding MFIs with more money they can reasonably manage?

Today, one of the biggest needs for support appears to be for capacity building to strengthen the fundamentals of retail financial institutions. Strengthening risk management, governance, and management of microfinance providers is critical to help address the current challenges facing the industry and will be important for the healthy growth of the sector.

But what is the most effective way to build capacity on a massive scale and who can do it best?

Surprisingly, we don’t know much about the effectiveness of different models of technical assistance. One of the best models to build capacity and increase outreach of microfinance is through the creation of new institutions, like a Greenfield in Madagascar, or by focusing on the development of local MFIs using technical assistance providers like KFS in Kenya.  Context matters of course, but is there a way we can compare the sustainability and cost effectiveness of models? Can we come up with some indicators to measure the effectiveness of technical assistance, for instance based on the cost per client reached? This could help guide future capacity building investments. 

Another question to ask: is there a shortage of good technical assistance providers to build the capacity needed? And if so, what can we all do to address this issue and ensure a sustainable delivery of quality services?

In early 2007 I worked with a CGAP team to design, develop and pilot test an index to measure a funder’s effectiveness in supporting microfinance.  With so much emphasis placed on improving aid effectiveness and so little ability to track progress, our hope was to demonstrate that an index could be a meaningful tool to inform and incentivize donor agencies.   The exercise had its challenges.  The index had to measure preparedness, processes and other inputs rather than outputs, be relevant to a wide variety of funders, worthwhile for participants and cost effective.   And yes, it had to have a catchy title.

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If you’ve been to any microfinance conference lately you would think that retail investors, through Kiva, have completely taken over financing MFIs or that the Gates Foundation is the only mover and shaker in this industry. But is this really the case? The microfinance funding landscape is definitely evolving – with more and different funders than ever before – but has it really changed that much?

The results of CGAP’s annual Microfinance Funder Survey, released recently, provide a bit of a reality check, showing that once again the media and propaganda in the airwaves are not really capturing what is happening in the field. The survey’s bottom line is: yes there is more money in microfinance than ever before – nearly $3 billion disbursed in 2008; and yes, there are more funders than ever before – 61 responding to the survey; but the faces that are most prominent are those we’ve seen time and again. If we look at the top five funders worldwide there aren’t any surprises KfW, AsDB, World Bank, EBRD, and IFC provide the bulk of cross-border funding to microfinance.

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