An Evaluation of Hivos Seed Capital Grant Programme for Microfinance

Transcription

1 An Evaluation of Hivos Seed Capital Grant Programme for Microfinance -With Emphasis on the MicroScore Tool to Assess MFI Graduation Performance- Prepared for : The Second European Research Conference on Microfinance, June 2011, Groningen, The Netherlands Author : Anita Jurgens, Programme Officer Financial Services and Enterprise Development, Hivos Based on the seed capital evaluation report of Joost de la Rive Box, Nedworc Foundation May 2011

2 1 INTRODUCTION This paper provides a summary of the evaluation of Hivos seed capital programme, that is based on the purpose-developed graduation performance tool called MicroScore. The seed capital programme is part of the Hivos growth model, which is a reflection of the growth or graduation model of MFIs (from ermerging to expanding to mature institutions). Normally this graduation is measured by the proxy indicator of financial self-sufficiency. MicroScore not only looks at financial sustainability, but also takes into account institutional development, governance aspects and quality of the services provided, as these are all essential elements to success. This allows a much more thorough, though quantitative, analysis of MFI graduation. 1.1 Hivos A fair, free and sustainable world that is what Hivos, the Humanist Institute for Development Cooperation, wants to contribute to. Together with local organisations in developing countries, Hivos strives for a world in which all citizens both men and women have equal access to resources and opportunities for development. Hivos supports over 600 partners in 26 countries in Africa, Asia and Latin America in the fields of sustainable economic development; democratisation, human rights, gender and AIDS; culture, ICT and media; and responsible citizenship and transparency. Hivos provides financial resources, knowledge and advice as well as political support. In addition, Hivos itself is active in the area of policy advocacy, both on the international stage and in the Netherlands. Hivos has been supporting the financial sector in developing countries since Hivos firmly believes that people are well capable of shaping their own futures if they are given the resources to do so. For this reason, Hivos supports microfinance institutions providing facilities to save as well as to take loans to millions of people in developing countries, allowing them to earn their own livings. Influencing national policies of developing countries to improve access to financial services, particularly for the poor and marginalised, is another goal. 1.2 The Hivos Triodos Fund (HTF) Hivos was the first NGO to cooperate with a bank. Hivos and Triodos Bank joined forces in 1994 to establish a new investment fund entitled HTF. This Public-Private Partnership combines Hivos resources and knowledge on development processes with the banking expertise of Triodos Bank NV. Triodos International Fund Management BV manages the fund. HTF provides loans and equity investments to MFIs that are not yet eligible for commercial funding. HTF provides loans on commercial terms, but with a public guarantee, allowing it to accept a higher risk than fully commercial investors. Most of the loans are provided in local currency. When equity participations are made, Triodos staff occupies a seat in the board of the MFI. Providing international micro-finance expertise to organisational decision-making is part of the HTF capacity building approach. 1.3 The Seed Capital Package At the start of the new millennium a gap was identified in the instruments that Hivos and the Hivos-Triodos Fund (HTF) had at their disposal to support the growth of young Microfinance Institutions (MFIs). Many small MFIs need capital for on-lending, in order to reach a level of sustainability and increase outreach. However, for HTF, let alone for fully commercial investors, the amounts required are too small, the investments too risky and monitoring too costly. At the same time, within Hivos' economic policy, grants could only be provided for capacity building, training, technical assistance (TA), institutional development - and in exceptional cases for covering part of the start-up losses or for basic investments, but not for loan capital. Therefore Hivos developed a new instrument to fill (part of) the gap: the seed capital package, which includes a component for expansion of the loan portfolio, besides grants to cover (part of) the investment cost, grants to compensate (part of) the initial losses and grants for training and technical assistance. The objective of the seed capital package is to assist MFIs to reach a level of maturity within the time frame of the contract, which allows them to qualify for HTF or local credit funding. It is targeted at MFIs with potential for growth and potential to qualify for HTF or local credit funding. In developing this instrument, Hivos took into account the (positive) experience and lessons learnt by CGAP, WWB and UNDP/Microstart in providing seed capital through grant contracts with conditional tranches. Disbursement of tranches is linked to reaching pre-agreed, contractual minimum performance targets. 2

3 1.4 The Hivos Growth Model With the seed capital package and the Hivos Triodos Fund, Hivos has a range of instruments at its disposition to support MFIs to develop into financially sustainable institutions with a clear social mission. The selection of which instrument to use to support an MFI depends primarily on the level of development of the MFI, that is, the position of the institution on the MFI life cycle curve. The appropriate instrument for younger organisations and organisations in earlier development stages (indicated by the number of years of experience, management capacity, operational self-sufficiency and the size of the organisation) is seed capital. This is followed by (and sometimes partly overlaps with) loans and equity investments from the Hivos Triodos Fund, which focus on more mature MFIs. Finally, the Triodos Fair Share Fund (capitalised by private investors) provides capital to MFIs on fully commercial terms. This is illustrated in the following diagram: The Typical MFI Life Cycle Curve Y-axis: Profitability, and other performance indicators Hivos grant for capacity building, product development etc. Commercial funding Hivos seed capital Hivos Triodos Fund (HTF) Operational sustainability Financial sustainability Time The Hivos growth model is a reflection of the growth or graduation model of MFIs that considers three stages in the growth process of MFIs: emerging, expanding and mature institutions. These stages are usually defined as follows: Emerging institutions OSS 1 <100% Expanding institutions OSS>100%, FSS 2 <100% Mature institutions FSS>100% Operational self sustainability and financial self sustainability are commonly used as proxy indicators for graduation. 1.5 Evaluation of the Seed Capital Programme In 2008 HIVOS has executed an extensive internal evaluation of its seed capital programme, based upon interviews with staff involved, a satisfaction survey among partner institutions and analysis of monitoring information and statistics. This investigation has generated a wealth of information on the programme, and 1 OSS: Operational Self Sustainability 2 FSS: Financial Self Sustainability 3

4 a rich overview of views and opinions among partners and staff. This evaluation process was concluded with an external outsider s view 3, in order to ensure objectivity of assessment and possible further enrichment of findings and recommendations. The evaluation exercise intended to have a detailed look at the graduation of MFIs, beyond the proxy indicators of OSS and FSS. 2 MicroScore: a Graduation Performance Monitoring Tool As the purpose of the Seed Capital programme evaluation was to assess MFI graduation beyond looking at financial and institutional sustainability only, a method had to found to include other aspects, like institutional development and governance. In order to assess the success of capacity building through seed capital finance, a graduation rating approach has been worked out, based upon a standard tool called MicroScore 4. The tool measures MFI graduation through an annual assessment over a period of three to five consecutive years. It uses the core methodology of rating institutions to arrive at a performance rate on four major aspects: (a) Governance, (b) Institutional aspects, (c) Services and SPM and (d) Financial performance. In order the define the scores, the rating scales of 5 major rating agencies have been compared; Micro- Rate, Planet Rating, MicroFinanza, M-Crill and Accion Camel. Recently an effort has been undertaken to harmonize the approaches and methods of Rating Agencies 5. All rating agencies distinguish 9 10 levels of performance, with different labels to distinguish them (Alfa Gamma, E A+, D-AAA etc.). As there is no universal labelling system, in MicroScore the numbers 1-9 have been used for these increasing levels of performance. In the levels of maturity in MFIs performance three phases are distinguished: Emerging (rate 1-3); Starting or young MFIs that are in the process building up their operating systems and governance structure. They lack sound microfinance practice as compared to international best practice of the microfinance industry. Poor efficiency and effectiveness. Usually neither financially, not institutionally sustainable. Generally considered very risky for debt finance or commercial investors. Developing (rate 4-6); MFIs that are working to define a clear and rational relationship among the social, financial and operational considerations of sound microfinance practice as compared to international best practice. Satisfactory efficiency and effectiveness. Acceptable risk for debt finance or commercial investors. MFIs in this group are usually financially (marginally) sustainable, but not yet institutionally mature (i.e. weaknesses in governance, organization and services to be addressed). Mature (rate 7-9); MFIs with sound governance, effective large scale service delivery and well functioning operating systems. Applying best practice standards of the industry. Good efficiency and effectiveness. Low risk. It is noted that there are three marked differences between the traditional rating methodologies and the method of graduation rating; a. A rating by a rating agency is a thorough, highly structured and disciplined assessment, that may take a week or more of field assessments. The MicroScore tool can be used (like in this exercise) on the basis of secondary observations, using all sources of documentation available on the MFI (progress reports, financials, rating reports etc.). It can be used desk officers, local consultants or even MFI managers to track progress. Unlike ratings by rating agencies, it should not be used make comparisons between MFIs (as it lacks the rigid training and quality control of rating agencies). b. The MicroScore tool allows more attention (weight) to client services for clients and social performance management (SPM). The relative weights attached to the four main aspects can be defined by the scoring agency (in this study 25% weight for each of the 4 items). The tool is especially designed to track improvements in capacity building, in all four dimensions of MFI performance. c. Rating agencies approach MFI performance from the point of view of risk for investors. MicroScore looks at institutional and financial sustainability. This may give different assessments. Example: whereas a rating agency may consider expatriate management a big plus (less risk), 3 The external review of Hivos seed capital programme was conducted by Mr Joost de la Rive Box of NEDWORC Foundation. 4 MicroScore is a tool developed by Joost de la Rive Box of Nedworc Foundation for MicroNed in 2009, in conjunction with the HIVOS Seed Capital evaluation. MicroNed is a network of 5 Dutch organizations (Cordaid, Hivos, ICCO, Oxfam Novib and Rabobank Foundation) active in microfinance. 5 See: Report of the Microfinance Rating Methodology Working Group June 2007 Standard&Poors Microfinance taking root in the global capital markets. 4

5 from the graduation rating point of view it is seen more like a weakness, because transfer to institutional sustainability (requiring local management) has not yet succeeded. For a graduation scoring it is a great help when one or more ratings from a specialized rating agency are available. This way an anchoring point exist, and consistency with internationally accepted rating levels can be ensured. Moreover, rating reports contain an independent analysis of governance and management, that might be harder to deduce from MFI reports. 3 Graduation Performance of Hivos Seed Capital Partners As part of the external evaluation exercise (see paragraph 1.5), out of a total of 21 Seed Capital projects, a selection was made of those that be scored. Out of the total 7 projects could not be scored because of the following reasons; 3 projects were contracted in 2008 and hence the period of performance monitoring is insufficient 4 projects could not be scored because the Business Plan and or the Annual reports were not SMART 6 enough, to measure actual performance against targets The 14 projects scored were all assessed in the period During the 3-5 years of HIVOS seed capital funding the MFIs have showed marked progress in all four aspects of MFI performance, with their scores in average increasing from the mid-emerging level (3.4 score) to well within the level of developing MFIs (score 5.43). Development of the average scores for the HIVOS Seed Capital MFIs Score evolution 6,00 5,00 4,00 3,00 2,00 1,00 0,00 Scan Scoring range: 1-3 = Emerging 4-6 = Developing 7-9 = Mature Financial Performance Services & SPM Institutional aspects Governance The intake level for seed capital partners appears just correct. Starting MFIs or MFIs with very poor performance (level 1-2 score) are justifiably not eligible for Seed Capital funding as they lack basic criteria like having an ambitious though realistic business plan. In the average the MFIs have expanded their outreach very significantly during the five year period, from 3693 to 22,071 clients. This increase is remarkable as it implies an annual growth rate of over 100%. However this was in general also included in their business plans, and so it seems that ambitious growth targets have effectively been realized. In doing this, the MFI has gone through two critical phases Number of borrowers (target and actual) Target number of borrow ers Actual number of borrow ers 6 stands for Specific, Measurable, Achievable, Realistic and Time bound 5

6 At a level of 5000 clients administration can still be managed manually, but beyond some 10,000 clients computerization become desirable, or even mandatory. The second critical level is the larger number of branches required for a portfolio expanding from 10,000 to 40,000 clients. This is only possible with an effective system of decentralization of branches, and an equally effective system of supervision and internal control. 3.1 Governance The development of the average scores for the four main scoring items is reflected in the table below: Score summary Score for Governance 0,89 1,09 1,19 1,24 1,33 Score for Institutional aspects 0,83 0,91 1,04 1,26 1,35 Score for Services & SPM 0,84 1,02 1,17 1,31 1,42 Score for Financial Performance 0,84 1,10 1,22 1,33 1,34 Overall weighed average score 3,40 4,13 4,62 5,15 5,43 The score for governance at the start (scan 1) is above the average score, usually because the parent institution is of good reputation. The closing score for governance is lower however then the general score, which reflects a relative inability to let the governance structure and performance develop in tune with the rapid growth of the MFI. In this respect the parent institution (usually a multi-purpose NGO) sometimes becomes the slowing factor. For emerging MFIs invariably a process of separation from the parent needs to be undertaken, together with the establishment of a new legal entity. 3.2 Institutional development For the assessment of institutional development eight scores are used ranging from organization structure, general management, financial management, MIS, internal control etc. At the start, the institutional aspects score lower than the other aspects, reflecting the great need for improvement in many areas. This starts with the installation of operating systems, policies and procedures, and then moves to more specific fields such as internal control, computerized management information systems, HRD, management of decentralized operations etc. A very important point also is the capacity to Institutional aspects make a business plan, supported by professional financial projections. In most of the rated cases, the quality of business plans was lacking, even when local consultants had been engaged. 6,00 5,00 4,00 More guidance in this respect seems desirable. Score 3,00 2,00 1,00 0,00 Year of implementation 3.3 Services and SPM The following table gives an overview of the average portfolio development per MFI. Target and actual performance Target number of borrowers Actual number of borrowers Target Loan portfolio in US$' Actual Loan portfolio in US$' Loan per client in US$

7 The scoring of the quality and relevance of microfinance services is done on three levels; The capacity to deliver services; regional presence, branches, products, staff (the hardware ) The actual service delivery; growth of clientele, credit and savings portfolios, depth of outreach, average loan-sizes etc. (service performance) The results of these services for the clients; client satisfaction, impact, product stratification for social purposes etc (Social Performance Management). While the last aspect nowadays 6,00 5,00 4,00 Score 3,00 2,00 1,00 0,00 Services score / total score Year of implementation receives a lot attention, historically often limited information is available on impact and SPM, and thus the former two aspects are used as proxies. The Score for Services and SPM is increasing in parallel to the improvement of the total score. Microfinance often starts as a program of a multipurpose NGO. While at the start the governance and organization may still be inadequate, often the services provided to clients / beneficiaries are relevant and adequate. And while the MFI is developing, often this is done in parallel with high rates of growth of portfolios, as observed above. And so, service delivery takes preference over the other aspects of microfinance development, indicating a mission driven type of development. 3.4 Financial performance The score for financial services is build up from four sub-scores: Financial strength Portfolio quality Efficiency Sustainability During the seed capital finance period in general operational self sufficiency was achieved. This graph shows that HIVOS mainly has selected partners for seed capital with OSS lower then 100% (i.e. not yet profitable). It shows that HIVOS has concentrated on a relatively immature bracket of MFIs. This is an issue for reconsideration in the future, as even profitable MFIs (OSS > 100%) may very well still be in need of capacity building for institutional strengthening. 140,00% 120,00% 100,00% 80,00% 60,00% 40,00% 20,00% 0,00% Operational Self Sufficiency 9,00% Portfolio at Risk (PAR) Target PAR Actual PAR 8,00% 7,00% 6,00% 5,00% 4,00% 3,00% 2,00% 1,00% 0,00% Also with respect to the PAR a clear improvement can be observed. In average from some 8.3% at the start of the contract, to 3.8% at the end. It proves difficult though to reduce the PAR, as the actual performance is consistently lower than the targets formulated in the business plan. On the other hand, in view of the fact that HIVOS supports especially MFIs that focus on rural and clients and non conventional systems such as wholesale finance of Self Help Groups, 7

8 the actual level of 4% is quite good at this stage. The average score for financial performance, taking into account all four sub-scores, is slightly higher then the average, especially after the first year of collaboration. The first year of scoring often reflects a baseline situation. The business plan outlines clearly the need to mitigate weaknesses in portfolio quality and invariably the need to improve financial sustainability. Hence the initial Financial score / total score improvements. Towards the end of the growth cycle often a consolidation of the score is observed, as the MFI may face difficulty in maintaining the portfolio quality in what by then is a much larger operation (over 8 times larger). This is a normal phenomena as in this expansion period a lot of attention needs to be given to proper installation of MIS, centralization to the branches, introduction of new products etc. Score 6,00 5,00 4,00 3,00 2,00 1,00 0,00 Hence it needs not to be worrisome, a long as management undertakes timely remedial Year of implementation measures. 4 Conclusions The depth of the exercise, looking beyond the traditional proxy indicators of OSS and FSS, has provided a wealth of information that other exercises have not revealed. For example, the programme evaluation of the micro finance programmes of the Ducth co-financing agencies (CFAs 7 ) used the traditional proxies and indicated that although CFAs contribute to more outreach of MFIs there was limited graduation. In other words effects of the interventions were not visible, leading to the conclusion that CFAs did not contribute a lot to graduation. MicroScore on the other hand, by taking into account other aspects than only financial performance, shows that graduation is not a linear development for all aspects. Also, graduation on financial performance goes hand in hand with graduation on governance, institutional development and services provided. Therefore it is important to include all these aspects when assessing the effectiveness of an intervention. Based upon the observations from the external evaluation of Hivos seed capital programme, it can be concluded that the MFIs assessed have graduated in all four major fields of development, and hence, by implication, it may be deduced that capacity building has been effective. The speed of graduation appears to be satisfactory as an average, but it is noted that there are substantial differences within the portfolio. The table below shows the minimum performer and the maximum performer. Score summary Minimum graduation score 1,25 2,08 2,57 2,79 2,47 Average graduation score 3,40 4,13 4,62 5,15 5,43 Maximum graduation score 3,77 4,48 6,65 6,72 7,16 The lowest graduation was an increase in score of 1,2 and the highest an increase of 3.4. The average increase with 2 full score points - from emerging to developing MFI is considered quite satisfactory, as this is in line with the objective of bringing MFIs to the point of creditworthiness for debt funding agencies such as HTF. MFIs on the level of a 4 5 score certainly belong to this category. In interpreting these results, it must be kept in mind that four MFIs could not be scored because their business plans and/or progress reporting were not SMART enough to allow measurable assessment. An important issue for HIVOS should be to reduce the percentage of non-rateable partners, by even stricter appraisal in advance and/or more effective assistance in formulating a business plan and financial projections, prior to entering in a seed capital arrangement. This could well be done through an initial one year bridging finance arrangement for improving in-house capacity to work out a professional business plan and financial projections. 7 Joint Evaluation of the Conribution of CFAs to the Microfinance Sector, Synthesis report. Partos, February

9 When comparing Microscore maturity phases with the Hivos growth model, it can be seen that at the beginning of the seed capital support, MFIs were typically at the end of the emerging or at the beginning of the developing stage. 70% of the supported MFIs have become operationally self sufficient and have access to local or international debt finance: some through HTF, others through other providers. Y-axis: Profitability, and other performance indicators Hivos seed capital Hivos Triodos Fund (HTF) Commercial funding Emerging (rate 1-3) Developing (rate 4-6) Mature (rate 7-9) Time The advantages of the MicroScore tool, besides showing progress on all relevant aspects and not only financial performance, are: It uses similar progress categories as micro finance rating agencies. This makes it possible to convert independent external ratings into MicroScore and use these as an anchor. Also MFIs or Hivos programme officers may fill in the tool. To guarantee objectiveness, this than can be checked by one or two independent external ratings. It allows to indicate progress on a quantitative scale it facilitates portfolio management by showing quantitative annual progress by component by seed capital partner. These results illustrate that grant funding can very well be a successful instrument to stimulate the development of financially sustainable microfinance institutions. By not only looking at financial performance, but also taking into account other aspects like governance, institutional development and service delivery, an indepth insight in the strengths and weaknesses of an MFI is obtained. This broad view gives a very detailed picture of the development process of an MFI, and illustrates that the seed capital instrument has facilitated this development. 9