Apex

Apex Institutionsin Microfinance: 

Apex Institutions in Microfinance

PRESENTATION INSTRUCTIONS: 

PRESENTATION INSTRUCTIONS This is a DIRECT presentation designed for microfinance donors. These slides may be used or changed without permission. Attribution to CGAP/DIRECT is appreciated. Slides are accompanied by notes. To view notes, select from the PowerPoint menu: View/ Notes Page. Scroll to advance to next page. To print notes, select File/ Print/ Print what: Notes Pages. To print handouts of just slides (no notes), select File/ Print/ Print what: Handouts. Then enter the number of slides to print per page. For optimal printing on a black-and-white printer, select from the menu: File/ Print/ Pure Black and White. April 13, 2003

Overview: 

Overview Why are apexes attractive to donors? Common challenges faced by apex institutions Characteristics of good apex institutions How can donors support the development of good apex institutions?

Why are Apexes Attractive to Donors?: 

Why are Apexes Attractive to Donors?

Apexes: Expectations vs. Reality: 

Apexes: Expectations vs. Reality Expand access of MFIs to financial resources Select viable MFIs Improve donor coordination Money is not always the major constraint limiting the expansion of microfinance services. Apexes often lack technical capacity to appraise MFIs and find it difficult to escape political pressures. Donor flexibility is often constrained by legal and political mandates. Bring funding and TA to a larger number of MFIs REALITY EXPECTATION Effective coverage of a country’s microfinance market may not require a large number of MFIs.

Apexes: Expectations vs. Reality: 

Apexes: Expectations vs. Reality Create bridges between MFIs and capital markets Supervise MFIs Prudential supervision poses a conflict of interest with lending and TA activities. Reduce cost of TA & training Expected economies of scale are not possible without a sufficient number of capable MFIs. Build strong MFIs (institution bldg) Development of viable microfinance capacity is slow and costly. In general, apexes have not facilitated the access of MFIs to commercial funding markets. REALITY EXPECTATION

Common Challenges: Market Conditions: 

Common Challenges: Market Conditions Number of potentially sustainable MFIs without access to commercial sources of funds

Common Challenges: Interest Rates: 

Common Challenges: Interest Rates If rates do not cover operational and financial costs, retailers may: Only operate for a limited time Reach only a limited number of clients Below-market rates skew incentives: Retailers have no incentive to mobilize market funds Reliance on donor funds is ongoing “Easy Money” may discourage savings mobilization

Other Common Challenges: 

Other Common Challenges MFI selection Replicating apex models Disbursement pressure Building bridges to commercial funding Ensuring permanence The number of viable MFIs is a constraint for most apexes Apex planners frequently overestimate the number of qualified MFIs Context matters! There is no “one-size-fits-all” model Pressure to disburse funds quickly can result in funding low-quality MFIs Cheap apex funding can reduce incentives for MFIs to seek commercial funding Apex funding of commercial banks and finance companies rarely results in their continued provision of microfinance

Challenges: Examples: 

Challenges: Examples Balancing roles of wholesaler & retailer (PADME - Benin) Overestimating market demand (FondoMicro - Dominican Republic) Conflicts of interest (PMP - Bolivia)

Characteristics of Good Apex Institutions: 

Characteristics of Good Apex Institutions Operations Mission Management Governance Long-term commitment to developing of sustainable microfinance providers High quality management: microfinance expertise, managerial and financial skills, integrity Use of clear selection criteria to fund MFIs Loans tailored to MFI cash flows and needs MFIs monitored via a few well-defined, enforced performance targets Political independence and decision-making autonomy

Elements of Success : PKSF (Bangladesh): 

Elements of Success : PKSF (Bangladesh) Operates in large, advanced microfinance market Availability of skilled human resources Government supportive, but non-interventionist Focus on sustainability Favorable Conditions MFI Selection Focus Organizational structure Reputation Management quality Staff capacity & efficiency Past performance MIS Minimum loan recovery rate

How can Donors Support the Development of Good Apex Institutions?: 

Design Transparency & Performance Standards Operations Promote Strengthen How can Donors Support the Development of Good Apex Institutions? Improve

Improving Design: 

Improving Design Perform a rigorous financial and operational analysis of MFIs to be funded by the apex MFI Selection Disbursement Management Identify appropriate apex managers at the outset Ensure that management can make decisions on technical grounds (create a strong board to mitigate political intervention) Minimize disbursement pressure Provide modest initial funding Base subsequent funding on demonstrated demand from quality MFIs

Improving Design: Selection Criteria: 

Improving Design: Selection Criteria

Promoting Performance Standards: 

Promoting Performance Standards Strengthen the strategic focus on viable MFIs Strategic focus Performance Political independence Ensure political independence of the apex Limit or eliminate government participation on the board Name powerful private directors committed to the technical independence of the apex Improve apex tools for measuring MFI loan portfolio quality, financial sustainability, and client outreach Tie future disbursements to apex performance

Promoting Transparency: 

Promoting Transparency Management Information Systems Assessment/ Performance Measurement

Strengthening Operations: 

Strengthening Operations Reduce restrictions on how MFIs use apex funds, except where necessary to prevent fraud Use of funds Monitoring Donor-Apex relationship Monitor MFIs according to institutional performance targets Focus appraisal, contract requirements, reporting, and monitoring on the institutional viability of the MFIs funded by the apex

Monitoring MFI Institutional Performance: 

Monitoring MFI Institutional Performance Outreach: Number of active borrowers Capital and Liability Structure: Capital/asset ratio Portfolio Quality: Portfolio at risk Efficiency: Operating cost ratio Productivity: Loan officer productivity Profitability: Adjusted return on assets

Summary: 

Summary The major constraint to the expansion of financial services to the poor is not money but lack of retail capacity. To be successful intermediators, apexes need a developed microfinance market and a sufficiently large number of potentially viable microfinance institutions. Successful apexes require microfinance knowledge and skills, autonomous governance, plus strong management, information systems and incentive structures. Cheap apex funding can reduce incentives for MFIs to seek commercial funding or mobilize savings. Developing sustainable microfinance institutions requires time, rigorous selection, and performance monitoring.

Where to Get More Information: 

Where to Get More Information Fred Levy, “Apex Institutions in Microfinance,” CGAP Occasional Paper No. 6 (January 2002) “Capital versus Capacity,” CGAP Donor Brief No. 3 (May 2002) Claudio Gonzalez-Vega, “Microfinance Apex Mechanisms: Review of the Evidence and Policy Recommendations,” CGAP-OSU Research Project on Microfinance Apex Mechanisms (August 1998) CGAP Appraisal Format for Microfinance Institutions, CGAP Technical Tool No. 4 Contact: Nataša Goronja 1818 H Street, NW Washington, DC 20433 Tel: 202-473-9594 Fax: 202-522-3744 E-mail: cgap@worldbank.org Web: www.cgap.org