UNCDF and UNDP: Partnerships in Inclusive Finance : UNDP Microfinance Policy

Policy

UNDP has committed, together with many of our leading stakeholders, to improve our work in the area of microfinance. In February 2004, UNDP co-hosted a High Level Meeting of Development Ministers whose agencies had also participated in the Peer Review process. These agencies committed to reconvene in 2006 to review progress. The Ministers agreed that “ accountability and transparency on performance of the portfolio are more important than looking good.” We also noted that transparency is critical to reaching our shared vision of creating sustainable access to financial services for poor and low-income people. In that spirit UNDP asked the Consultative Group to Assist the Poor (CGAP) for an independent review of UNDP’s microfinance portfolio and committed to publish the results.[1]

CGAP’s Portfolio Review confirms many of the issues indicated in our initial Peer Review.[2] These recommendations provide a solid basis to improve our performance. The good news is that we do have models that have proven successful. To assure that we utilize these models and their associated best practices, all new microfinance related programming in UNDP will be done within the following framework:

UNDP will use the principles of UNCDF’s MicroStart model whenever it funds, or administers the funding of others for, microcredit operations. The key elements are:

• Project implementation should be done, or very closely guided by, a technical service provider (TSP) that has a proven track record to produce sustainable microfinance.[3] These should come from a list of providers screened by UNCDF. Other TSPs who meet requirements may be used only with the approval of the responsible regional microfinance specialist. Many of these TSPs are practitioners from the South. This presents an excellent opportunity for TCDC.
• Each UNDP-supported microfinance institution should report key performance indicators every quarter to the MIX Market.[4] Costs of reporting should be included in programme budgets. The indicators should include at a minimum the number of active clients, average loan size, portfolio quality, and cost recovery.[5] Calculation of these indicators should follow accepted guidelines.[6]
• Performance based grant agreements should be utilized in all cases.[7] MFIs that do not meet performance standards should be dropped from the programme unless the technical service provider is confident that MFI managers will promptly correct the problems.
• Grant Agreements should be prepared between UNDP and a private[8] financial services entity and approved by a steering committee with minority Government representation. Microfinance and financial services are essentially a private sector activity. Government efforts should focus primarily on removing constraints in the enabling environment.
• Regional technical experts should collaborate closely with the Country Office in design, implementation, and monitoring of the project. These experts should clear each new programme and certify its compliance with UNDP policy prior to approval. These experts should also assure and track quarterly reporting and inform management where inadequacies are found.
• UNDP Regional Bureaus will be responsible for the quality of microfinance programming within their respective regions. Together with UNCDF they will select well-qualified regional microfinance experts to support country programming. These experts will report jointly to the Regional Bureau and UNCDF.[9]
• In the Least Developed Countries (LDCs), UNCDF should be actively involved in the design and implementation of any microfinance programme. UNCDF should also co-invest with Regional Bureaus and Country Offices in microfinance activities in the LDCs to the greatest extent possible.
• All UNDP staff and their counterparts in Central Banks or partner ministries responsible for microfinance related programming will be trained with resources from country programme budgets at courses such as Turin (www.itcilo.org/microfinance) or the CGAP course http://www.cgap.org/direct/special/training.php.
• Country Offices must consult with government, all other donors, and stakeholders before approving any new microfinance support in a specific country or with specific institutions to ensure complementarity and avoid undermining others in the market.
• Microfinance programming will be done within stand-alone programmes whenever possible. Credit components in broader programmes tend not to get adequate management attention and have performed poorly.
• Microfinance programmes should generally exceed U.S.$ 500,000 in the aggregate and should target programme budgets of more than U.S.$1 million. This is to assure that the programmes have sufficient scale and resources to attract skilled technical experts and also to have sustainable impact.[10]
• As a general rule, because their results to date have been very poor, UNDP will no longer fund Community-managed revolving loan Funds.[11] Community-managed revolving loan fund projects involve external funding of loans within community-based groups where a credit fund for members operates without substantial oversight and management from professional staff of a specialized financial institution.

The Office of Audit and Programme Review (OAPR) is requested to include compliance with this framework in its risk assessment. Where Country Offices have programmes that are in progress, we encourage you to bring them in line with these standards.

UNCDF will continue to serve as policy advisor to UNDP for all microfinance matters. In addition, UNCDF will continue to represent UNDP in CGAP and to provide policy support to the Office of the Administrator. UNCDF will be responsible for monitoring the implementation of this policy and advising on changes, as needed. Please contact John Tucker (john.tucker@undp.org), Microfinance Advisor at UNCDF, for clarifications on implementing this policy.

Background

Background: The CGAP Peer Reviews:

1.1 Early in 2002, CGAP joined with DFID Secretary of State Clare Short and other Ministers and agency heads to launch a unique aid effectiveness initiative: Microfinance Donor Peer Reviews. The driving force was the belief that a key constraint to microfinance achieving its potential to contribute to the MDGs was the effectiveness of donor support. A total of 17 bilateral and multilateral agencies signed on to the review exercise. A High Level Meeting, co-chaired by UNDP Administrator Mark Malloch Brown, and including agency heads and leaders was held in February 2004. Participants at the High Level Meeting agreed on a common action plan outlined in a Joint Memorandum, and endorsed the five elements of donor effectiveness in microfinance that emerged from the Peer Reviews.

Peer Reviews addressed aid effectiveness from a unique perspective. Rather than concentrate on constraints at the country level (governance, corruption, macroeconomic instability, etc.), the reviews focused on what donor agencies can most directly influence: their own procedures, practices, processes and systems. The reviews identified success factors and constraints to applying good practice in microfinance and provided concrete recommendations in Letters to Management for each agency.

Key documents

Elements of Effectiveness*

* From CGAP, Donor Peer Reviews

Strategic Clarity and Coherence

The emerging vision of Inclusive Finance was one of the key results of the International Year of Microcredit in 2005. In launching the Year, United Nations Secretary General Kofi Annan, (29 December 2003) noted:

"The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector…Together, we can and must build inclusive financial sectors that help people improve their lives.”

One of the key projects of the Year was the ‘Blue Book’ on Building Inclusive Financial Sectors for Development that articulates the vision that supported by a sound policy, legal and regulatory frameworks , each developing country should have a continuum of financial institutions that together offer appropriate financial products and services to all segments of the population. This would be characterized by:

• access at a reasonable cost of all households and enterprises to the range of financial services including savings, short and long-term credit, leasing and factoring, mortgages, insurance, pensions, payments, local money transfers and international remittances;
• sound institutions guided by appropriate internal management systems, industry performance standards, performance monitoring, and sound prudential regulation;
• financial and institutional sustainability as a means of providing access to financial services over time; and
• multiple providers of financial services, wherever feasible, so as to bring cost-effective and a wide variety of alternatives to customers.

To realize the vision of financial inclusion, financial services for poor and low-income people and micro and small enterprises should be seen as an important and integral component of the financial sector . This sector should include a continuum of financial institutions, each with its own comparative advantages, and each presenting the market with an emerging business opportunity.

Why does UNDP support inclusive financial sectors?

World leaders have pledged to achieve the Millennium Development Goals (MDGs), including the overarching goal of cutting absolute poverty by half by 2015. UNDP’s coordinates global and national efforts to reach these Goals. Lack of access to financial services for the majority of the population is a major roadblock to achieving the MDGs in the countries where UNDP works.

Access to financial services underpins the ability of poor and low-income people to achieve the MDGs on their own terms in a sustainable way. Development of the financial sector induces 1] incomes of the poor to grow faster than GDP per capita; 2] income inequality to fall more rapidly; and 3] poverty rates to decrease at a faster rate. Financial services enable the poor to increase and diversify incomes, build human, social and economic assets, and move from everyday survival to planning for the future. Poor people use financial services to invest in better nutrition, housing, health, and education. Microfinance often specifically targets women. Financial services to poor women provide a direct, positive impact on their families, as a majority of the additional income earned is invested in family health, education and nutrition.

UNDP promotes the development of inclusive financial sectors as part of its poverty reduction work and as support to the private sector.

Strong Staff Capacity

Regional Technical Managers:

UNDP Policy States that:

• “Regional technical experts should collaborate closely with the Country Office in design, implementation, and monitoring of the project. These experts should clear each new programme and certify its compliance with UNDP policy prior to approval. These experts should also assure and track quarterly reporting and inform management where inadequacies are found.”
• “UNDP Regional Bureaus will be responsible for the quality of microfinance programming within their respective regions. Together with UNCDF they will select well-qualified regional microfinance experts to support country programming. These experts will report jointly to the Regional Bureau and UNCDF.”

Regional Technical Managers Contacts

West Africa: Makarimi Adechoubou, Regional Technical Manager (email: makarimi.adechoubou@undp.org)
Eastern/Southern Africa: Fode Ndiaye, Regional Technical Manager (email: fode.ndiaye@undp.org)
Latin America and the Caribbean: Henry Jackelen (email: henry.jackelen@undp.org) or Fleming Duarte (email: fleming.duarte@undp.org)

These Regional Bureaus have yet to put in place their regional technical managers. In the interim, UNDP Country Offices in these regions should request guidance from their respective regional bureau as to when this technical expertise will be in place.

Arab States: To be determined
Asia: To be determined
Europe and CIS: To be determined

Terms of Reference for the Regional Technical Managers: [ pdf ]

In addition to regional technical expertise, UNDP Policy requires that all UNDP focal points in Country Offices and their counterparts receive training. UNDP’s policy requires that: “All UNDP staff and their counterparts in Central Banks or partner ministries responsible for microfinance related programming will be trained with resources from country programme budgets at courses such as Turin or the CGAP course."

Accountability for Results

UNDP’s Policy requires that “Each UNDP-supported microfinance institution should report key performance indicators every quarter to the MIX Market. Costs of reporting should be included in programme budgets. The indicators should include at a minimum the number of active clients, average loan size, portfolio quality, and cost recovery. Calculation of these indicators should follow accepted guidelines. “

The MIX Dashboard to capture quarterly reporting is under development, and scheduled to be accessible to UNDP for capturing reporting in mid-2007. In the interim, UNDP Country Offices can utilize the following Excel files to capture quarterly reporting:

• Files for Financial Service Providers (FSP) to provide quarterly reporting [ Excel ].
• File for Country Offices to consolidate FSP reporting [ Excel ].

Knowledge Management

UNDP is a founding member of CGAP, the Consultative Group to Assist the Poor. CGAP’s serves as a platform for its 33 member donors to document international best practices and share knowledge for microfinance and building inclusive financial sectors.

• Donor Direct -- where UNDP staff can post queries to CGAP staffpersons and find resources tailored to donor related issues;
• The MIXMarket -- strives to facilitate exchange and investments flows , promote transparency and improve reporting standards in the microfinance industry
• The Microfinance Gateway, a virtual library/search engine

SEMFIN : In addition, UNDP staffpersons also have access to UNDP’s knowledge network (SEMFIN)

How to become a member of SEMFIN: UNDP Staff can sign up for membership to the networks in several ways.  Under the practices tab of the UNDP intranet, choose any of the preferred practices ( SEMFINet is found within Poverty Reduction, subpractice microfinance tab).  From there, on the left column is the “Network Information” link.  From there, there is a “Quick Links” section on the upper right page.  That will take you to a page that will allow you to join any of the networks. Or, email YK Kwon [yookyung.kwon@undp.org], the facilitator of the network directly.

Appropriate Instruments

UNDP’s Policy notes that “Microfinance and financial services are essentially a private sector activity. Government efforts should focus primarily on removing constraints in the enabling environment.”

General guidance for UNDP’s programming in microfinance/inclusive finance at the policy, supportive infrastructure or retail level can be found in two key documents at:

• Good practice guidelines
• Consensus guidelines

In line with UNDP’s policy, UNDP Country Offices are required to engage their Regional Technical Managers from the outset of programme design.

Sector Assessment

To determine the appropriate support to the sector, a sector assessment that analyses the opportunities and constraints is a useful starting point. The Regional Technical Manager can assist UNDP Country Offices in developing terms of reference [ see attached PDF File ], carrying out these assessments, or in identifying qualified consultants to assist in the design. By engaging the Regional Technical Manager from the outset, the Country Office will have greater assurance of a strong design and receiving technical clearance required by the policy.

Performance Grant Agreement

Micro Capital Grants: UNDP’s mechanism for supporting retail Financial Service Providers (FSPs) are a flexible tool that can support FSPs business plans to expand and achieve sustainability. UNDP’s Policy requires that “Grant Agreements should be prepared between UNDP and a private financial services entity and approved by a steering committee with minority Government representation. Performance based grant agreements [download: Word File ] should be utilized in all cases. MFIs that do not meet performance standards should be dropped from the programme unless the technical service provider is confident that MFI managers will promptly correct the problems.” A standard model grant agreement is attached. Performance targets should be drawn from the FSPs business plan. If a business plan does not exist, the FSP could be given technical assistance in its preparation.

Reporting

UNDP Policies reporting requirements are noted above under accountability for results.