The Norwegian Development Network

GUIDELINES FOR APPRAISAL AND MONITORING OF MICROFINANCE PROJECTS

May 2002 by Jens Claussen, Nordic Consulting Group, Norway

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LIST OF ABBREVIATIONS
CGAP GDP MBB MF MFA MFI NDN NGO Consultative Group to Assist the Poorest Gross Domestic Product Micro Banking Bulletin Micro Finance Royal ministry of Foreign Affairs, Norway Microfinance Institution Norwegian Development Network None Governmental Organisation

NORAD Norwegian Agency for Development Cooperation USD United States Dollar

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TABLE OF CONTENTS

1. INTRODUCTION.......................................................................................................1 2. FORMATS FOR PROJECT DOCUMENT/PROGRESS REPORTS..................2

ANNEX I - SAMPLE PROJECT DOCUMENT/APPLICATION FORMAT ANNEX II - PROJECT DATA FORMATS ANNEX III - PROJECT SAMPLE

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1.

INTRODUCTION

In 1999 the Royal Norwegian Ministry of Foreign Affairs (MFA), the Norwegian Agency for Development Cooperation (NORAD) and the NGO partners in the Norwegian Development Network (NDN) commissioned a study of their portfolio of microfinance (MF) projects. The study was implemented in two phases; the first phase focussed on their approaches to microfinance, the second phase on actual performance of microfinance projects supported. The study revealed that there is a scope to improve procedures used by NGOs, NORAD and MFA in their monitoring of MF projects. The Norwegian NGOs promoting microfinance have for a long time felt the need for more structured formats for project design/applications and progress reporting enabling appraisal and monitoring of microfinance projects. The formats should take into account the specific indicators used for assessment of such projects like outreach, operational efficiency and financial sustainability. In response to the above, this document presents procedures and formats for appraisal and monitoring of MF projects. It is intended as a tool first and foremost for the members of the NDN and their partners in the South to improve their appraisal of microfinance project proposals and monitoring of their implementation. In the following some formats are presented that can be used for collecting and analysing information to serve the above purpose. They have been developed on the basis of the following criteria: The formats should be simple with an information requirement strictly on a "need to know" basis. The information required should be easily available by MF projects to limit the transaction cost for them in meeting donor appraisal and monitoring requirements. The performance indicators should be simple and easy to interpret but at the same time provide a comprehensive overview of overall performance of the MF project.

The formats in this document are based on more detailed and complete guidelines and tools, in particular: "Format for Appraisal of Microfinance Institutions: A Handbook" by CGAP (www.cgap.org/html/p_technical_guides04.html) and "Micro and small enterprise finance: Guiding principles for selecting and supporting intermediaries" by the Donor Committee on Small Enterprise Development (www.ilo.org/public/english/employment/ent/papers/financgd.htm). Guidelines that also include tools for impact and client satisfaction assessments may be obtained from various other sources specialising in the field of microfinance like USAID's impact assessment and micro enterprise best practices projects (www.mip.org) and MicroSave Africa (www.microsave-africa.com).

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2.

FORMATS FOR PROJECT DOCUMENT/PROGRESS REPORTS

Project document/application formats should be used as guidance to ensure that baseline information is collected for subsequent monitoring of performance by use of performance indicators. Most multilateral and bilateral donors use some form of logical framework in project design and have developed their own internal guidelines and formats to structure the project document/application. A sample of such a format is enclosed in annex I1. It may serve as a checklist for the formats used by respective NGO. All projects may be subject to the same formats for project documents/progress reports. For MF projects, however, there are some important additional features to consider ensuring that baseline information is collected to allow adequate monitoring. As a point of departure we suggest to use some few key indicators for appraisal and monitoring of MF projects grouped into three different categories: Outreach indicators 1. Average number of active clients serviced during the year (calculated as a yearly average of the weekly or monthly average number of clients or as an average between beginning of year and end year). 2. Average loan in percent of GDP per capita as an indicator of which income bracket of the population is being serviced (calculated as the average total loan balance divided by average number of loans divided by GDP per capita, the yearly average calculated in the same manner as average number of clients). 3. Percent number of clients saving during the year (average number of active clients saving divided by average number of clients, the average calculated in the same manner as average number of clients). 4. Percent women clients. Yearly average number of active women clients divided by the yearly average total number of active clients. Institutional indicators 1. Number of loans per staff (average number of loans divided by number of person-years of staff). It serves as an indicator of "physical" productivity of the project. 2. Administrative cost per loan (the administrative cost taken from the project/MFI accounts including all personnel costs and other administrative costs but excludes financial costs like interest and fee expenses and loan loss provisions). It serves as a financial productivity indicator. 3. Administrative cost in percent of total loan portfolio (the same administrative costs as above divided by the average total loan balance). It serves as an indicator of the cost of the service relative to the financial volume of the service provided.
1 Logical Framework is commonly used by most multilateral organisations and institutions (like the UN organisations and EU) as well as bilateral aid agencies (like all the Nordic agencies, DFID, GTZ, SNV, SDC, etc.).

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Financial performance/portfolio risk 1. Operational self-sufficiency (total operational income divided by total operational costs). It shows to what extent the total operational income is sufficient to cover total operational costs, but excludes return on equity or investments. If the ratio is 100 percent the total operation can be sustained without external funding however will not make any surplus. 2. Portfolio yield (interest and fee income in the year divided by the yearly average loan balance adjusted for inflation). It serves as an indicator of the financial performance of the loan portfolio and/or reflects the interest rate policy of the project. A high relative yield will typically picture a high real interest rate and/or low default rate. 3. Percent loan amount in default of more than 30 days (total loans with at least one payment overdue after 30 days divided by total loan balance). Preferably, there should also be an aging arrear report, covering, for example, 60 and 90 days and one year. It signifies the risk for future loss in income and financial assets. The above indicators give key information to overall performance and performance in each area (efficiency, effectiveness and sustainability). The data required to produce the above indicators are provided in the project data sheets presented in annex II and can be considered as formats to be attached to the project document and/or progress reports. In Annex III we present data from a sample project to illustrate how to calculate and interpret the indicators. The outreach indicators may be taken as an approximation to impact. Real impact assessment would, however, need additional information from a more in-depth study at household/client level preferably with a baseline study of a sample of potential clients prior to project implementation followed by annual/bi-annual surveys of the same "panel" of clients. It may include simple client satisfaction surveys based on interviews of a sample (or panel) of clients guided by a standard questionnaire to ensure consistency in data collection.2 There are no "global standards" for most of the indicators to compare whether the MF project is well performing or not. However, the Micro Banking Standards Project publishes a Micro Banking Bulletin (MBB) at regular intervals3. The MBB presents key indicators of a sample selection of large-scale specialised MF institutions considered to be among the best performers in the business. When comparing MF project indicators with the MBB panel it is important to take into account that economy of scale and geographical location are important factors in determining the above indicators. Some of the indicators may give some guidance regardless of country specific circumstances like; Average loan in percent of GDP per capita. This indicator will show whether the MF project is providing small, medium or large-scale loans compared to the average income level of the society. As an indicator of poverty focus one would expect that average loan in percent of GDP per capita is below 50

2 3

For guidance on impact assessment methodologies, client satisfaction studies and drop-out studies, see www.microsave-africa.com and www.mip.org. The MBB's homepage is www.microbanking-mbb.org.

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percent. For the sustainable MBB projects average loan size is well below GDP per capita. Percent loan amount in default of more than 30 days. Based on many empirical studies it is commonly claimed that a default rate above 5 percent will not make the MF project sustainable in the long run.

For all the indicators, however, the important issue is to assess changes over time, that the MF projects increases their client base (growth in average number of active clients) but at the same time maintains their poverty focus (average loan in percent of GDP per capita), that the institutional indicators show that physical and financial productivity is maintained or improved, and that the financial performance indicators develop favourably to make the MF project a more sustainable operation. There are important relationships between the outreach, efficiency and financial performance indicators, and they must be compared to each other to get a comprehensive view of an MFI's performance. For instance, a high portfolio yield might be a result of inefficiency, high administrative costs and consequently higher interest rates than necessary. Furthermore, reaching financial sustainability is not an ultimate goal for all MFIs. There might be sound reasons for subsidising MFIs for several years. However, it is important to know whether an MFI operates in a costeffective way. Inefficient MFIs pose excessive burdens on their clients. Even MFIs that obtain good performance indicators might not serve the clients in a satisfactory manner. Therefore, MFIs should conduct client satisfaction studies with the aim of improving their services and reduce the clients' transaction costs. For monitoring purposes the same indicators should be presented in the project applications and progress reports to allow comparison of projected versus actual indicators.

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ANNEX I - SAMPLE PROJECT DOCUMENT/APPLICATION FORMAT

1. BACKGROUND AND JUSTIFICATION A description of the project background rationale, and the political and institutional environments. In MF projects typically describing MF as a tool in poverty alleviation, the socio-economic situation of the target group, their current access to and need for financial services, the current market for MF in the country or area concerned including association of MFIs and donor coordination initiatives, and the regulatory framework for MF activities. 2. PROJECT LOGICAL FRAMEWORK Development Objective (Goal) Define an achievable goal and external risks that may have impact on opportunity to achieve it. For MF projects the goal is typically poverty reduction, increased income and wealth for households, empowerment of target groups, etc. Immediate Objective (Purpose) Define an achievable objective, quantifiable to the extent possible, (impact) indicators to assess if the objective has been achieved and external risks that may have impact on opportunity to achieve it. For MF projects typically number of clients serviced by MF services and their increase in income, household wealth and/or other indicators measuring impact of access to MF services. Project Outputs/Results Define all outputs to be produced, indicators to verify that they have been produced and external risks that may have an impact on the possibility to produce them. For MF projects typically description of type of financial and non-financial services, number of clients serviced by type of service, other outputs associated with the project. Project Activities For MF projects these are typically training of financial officers and branch managers, and identification and sensitisation of clients, developing and installing a management information system, setting up the organisation including developing the branch network. It should include a description of external risk that may affect the implementation of the activities. It should also include a description of the implementation arrangement with a schedule of reporting, reviews and evaluations. In addition, the project document should include a matrix showing each output with associated activity within a schedule also indicating cost per activity (Annexed to the project document). This matrix will subsequently form the basis for progress reporting. Project Inputs The MF project inputs typically include management/promoters and organisation, personnel, rent and/or construction of branches/offices, management information system and other non-material and material inputs with a description of external risks associated with the possibility to acquire them and maintaining them.

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3. PROJECT BUDGET AND FINANCING PLAN In annex II a proposed simple format for the MFI project budget is presented. It is based on the recommended standard format for appraisal of MF institutions developed by CGAP but represents a more simplified version. It captures the specific financial information of MF operations that can also serve as input to the calculation of outreach, institutional and financial indicators (ref. chapter 2 above).

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ANNEX II - PROJECT DATA FORMATS

INCOME AND EXPENDITURE (in USD) OPERATING INCOME A. Interest and fee income from loans B. Other operating income (not including grants and donations) C. Total operating Income OPERATING EXPENSE D. Interest and fee expense E. Loan loss provision expense F. Administrative expense Personnel G. Other administrative expense H. Total operating expense I. Net operating profit (loss) NON-OPERATIONAL INCOME/Expenditure J. Cash donations for financial services K. Other non-operational income L. Non-operational expenditure M. Total consolidated profit (loss) BALANCE SHEET (in USD) ASSETS N. Short-term assets O. Total loan portfolio P. (Loan loss reserve) Q. Long-term investments R. Net fixed assets S. Total assets LIABILITIES T. Savings accounts; clients savings U. Other liabilities V. Total liabilities W. Total equity X. Total liabilities and equity Year 1 . Year N Year 1 . Year N Year 1 . Year N Year 1 . Year N Year 1 . Year N

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BASIC DATA COUNTRY DATA AA. Inflation AB. Official GDP per capita in USD PROJECT DATA AC. Average total number of staff -years AD. Number of active clients end of year AE. Number of active women clients AF. Average total loan balance in the year AG. Number of loans end of the year AH. Average number of loans in the year AI. Average loan size in the year AJ. Total amount of loans end of year with payments delayed with more than 30 days AK. Number of active clients that are saving end of the year. PERFORMANCE INDICATORS OUTREACH AL. Average number of active clients in the year AM. Average outstanding loan in percent of GDP per capita AN. Percent active clients saving during the year AO. Percent women clients INSTITUTIONAL INDICATORS AP. Number of loans per staff AQ. Administrative cost per loan AR. Administrative cost in percent of loan portfolio FINANCIAL PERFORMANCE/PORTFOLIO RISK AS. Operational self-sufficiency AT. Portfolio yield AU. Percent loans in default of more than 30 days Year 1 . Year N Year 1 . Year N Year 1 . Year N Year 1 . Year N Year 1 . Year N

EXPLANATIONS To allow cross-country comparisons it would be beneficial if all data are provided in USD however they may be provided in local currency - in the latter case the Norwegian NGOs will have to make the currency conversions to make comparison with projects across countries. In integrated programs in which the microfinance operation is only one component, the income and expenditures should only reflect those associated with the MF component but including its share of general administrative costs of the total program.

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INCOME AND EXPENDITURE A. Interest and fee income from loans - All income on loans made to clients (use cash basis, or separate accrued interest from actual receipts. When loans become nonperforming, new accruals of unpaid interest should cease and old accruals of unpaid interest should be reversed). B. Other income - Fees for savings passbooks, insurance premiums, etc. Interest from bank accounts or investments in market instruments used primarily for liquidity management. It should not include donations and other contributions from donors and financial institutions. C. Total Operating Income - The sum of A and B. D. Interest and fee expense - Interest and fee expenses for all loans, deposits, or other liabilities funding the financial service operation. E. Loan loss provision expense - Cost of creating/maintaining the loan loss provision. If current period write-offs exceed reserves, take this expense here. F. Administrative expense personnel - All staff and consultant costs, including payroll taxes and fringe benefits (preferably on an accrual basis, especially in the case of major future benefits like severance pay obligations). G. Other Administrative Expense - Like rent, transportation, supplies, utilities, fees, depreciation, other associated with the financial services. H. Total operating expense = D + E + F + G. I. Net operating income = C H. J. Cash donations for financial services - Grants and other contributions from donors to the operation of the financial services. K. Other non-operational income - Income from investments which play no role in the delivery of financial services, income from non-financial services, sale of land, consultancies, etc. L. Non-operational expense - Any expenses not related to the MFIs financial services business, such as an evaluation or impact study mandated by a donor. M. Total consolidated profit (loss) - Net operating profit (loss) plus non-operational income, minus non-operational expenses = I + J + K L. BALANCE SHEET N. Short-term assets - Cash on hand, checking accounts or other instruments paying little or no interest. Reserves in central bank (relevant only for licensed financial intermediaries). Interest-bearing deposits and investments in financial instruments, where the principal purpose is liquidity management. Accounts receivable, accrued interest on loan portfolio. O. Total loan portfolio - Total outstanding balances of loans to clients, including loans past due but not written off. P. (Loan loss reserve) - A negative asset account: set-aside for estimated future losses on problem loans that have not yet been written off.

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Q. Long-term investments - Stock in any other enterprises, or other long-term, illiquid assets that earn returns. R. Net fixed assets - Land, building, equipment, net of accumulated depreciation S. Total Assets = N + O + P + Q + R. T. Savings accounts - Compulsory savings required as part of the credit methodology. Liquid deposits from the general public. U. Other short and long term liabilities -Time deposits like certificates of deposit from the general public. Loans at market rates from banks or other financial institutions. Rediscount or other special lines of credit from the central bank. Concessional loans from donors, etc. Accounts payable, accrued interest to be paid on loans and deposits. Mortgages on property. etc. V. Total liabilities = T+U. W. Total equity - Paid-in equity from shareholders like equity contribution of owners of stock. Donated equity received through cash donations from sources that do not receive stock. Cash donations for financial services. Accumulated consolidated profit (loss) previous years (M accumulated from previous years). Consolidated profit (loss) current year (M). Other capital accounts like special reserves or other capital accounts, plus any retained earnings from non-financial operation. X. Total liabilities and equity - Must be the same as total assets i.e. X = S. COUNTRY DATA AA. Inflation - the official consumer price index for the year published by the country's national bureau of statistics, central bank or other Government agency. AB. Official GDP per capita in USD - as published by the country's national bureau of statistics, central bank or other Government agency. PROJECT DATA AC. Average total number of staff-years - The yearly average number of staff-years employed in financial services calculated as a yearly average of the weekly or monthly average number of staff years or as an average between beginning of year and end year. For programs with a wider scope than microfinance this should give an estimate of the person time exclusively used for the financial services component including amount of input from general program administration etc. AD. Number of active clients end of the year - The number of active clients at the end of the year that are being serviced by the MF project. AE. Number of active women clients end of year - The number of active women clients at the end of the year that are being serviced by the MF project. AF. Average total loan balance during the year - Yearly average loan balance calculated as a yearly average of the weekly or monthly average of the loan balance or as an average between beginning of year and end year. Data on outstanding loan balance are provided in the balance sheet average can be calculated as the average between end of current year balance and end of previous year balance. AG. Number of loans end of the year Number of loans outstanding at the end of the year.

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AH. Average number of loans in the year Calculated as the average of AG in the same manner as average loan balance (ref. AF above). AI. Average loan size in the year = AF/AH.. AJ. Total loan balance end of year with payments delayed with more than 30 days The amount in USD of the loans that have delays in payments of principal and/or interest of more than 30 days. AK. The number of active clients that are also saving at the end of the year. PERFORMANCE INDICATORS Outreach indicators AL. Average number of active clients in the year - Average number of clients serviced during the year calculated in the same manner as AF above. Can use average between AD current year and AD previous year. AM. Average loan in percent of GDP per capita = AI/AB. AN. Percent active clients saving during the year Average number of active clients saving (average AK current and AK previous year) divided AL. AO. Percent active women clients - Average number of active women clients (average of AE current and AE previous year) divided by AL. Institutional Indicators AP. Number of loans per staff = AH/AC. AQ. Administrative cost per loan = (F+G)/AH. AR. Administrative cost in percent of total loan portfolio = (F+G)/O. Financial performance/portfolio risk AS. Operational self-sufficiency (total operational income divided by total operational costs) = C/H. AT. Portfolio yield (interest and fee income divided by average loan balance adjusted for inflation) = (A/AF)-AA. AU. Percent loan amount in default of more than 30 days = AJ/O.

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ANNEX III - PROJECT SAMPLE

In the following we present the data sheet for a small-scale microfinance project (some 1200 loans) from its third year of operation. The data is from a microfinance project in Nicaragua primarily servicing individual clients through a cooperative. As can be seen from the data below it is still expanding and still receives grant funding to support its financial services. The case may serve as an illustration of how to interpret the performance indicators as they have been calculated on the basis of the data presented (see comments below).
INCOME AND EXPENDITURE (in USD) OPERATING INCOME A. Interest and fee income from loans B. Other income C. Total operating Income OPERATING EXPENSE D. Interest and fee expense E. Loan loss provision expense F. Administrative expense Personnel G. Other administrative expense H. Total operating expense I. Net operating profit (loss) NON-OPERATIONAL INCOME/Expenditure J. Cash donations for financial services K. Other non-operational income L. Non-operational expenditure M. Total consolidated profit (loss) BALANCE SHEET (in USD) ASSETS N. Short-term assets O. Total loan portfolio P. (Loan loss reserve) Q. Long-term investments R. Net fixed assets S. Total assets LIABILITIES T. Savings accounts U. Other liabilities V. Total liabilities W. Total equity X. Total liabilities and equity 51 519 416 309 Year 1 12 558 109 124 121 682 294 627 416 309 114 431 583 475 Year 2 9 856 100 110 109 966 473 509 583 475 150 525 779 205 Year 3 5 564 94 881 100 445 678 760 779 205 12 321 199 004 Year 1 22 267 342 523 13 452 -92 133 Year 2 28 025 441 019 15 680 -6 310 Year 3 122 180 506 500 Year 1 137 165 14 788 151 953 Year 1 92 531 68 903 19 889 181 323 -29 370 Year 1 240 695 Year 2 156 183 29 747 185 930 Year 2 61 261 170 732 217 303 449 296 -263 366 Year 2 184 685 Year 3 248 427 32 438 280 865 Year 3 22 914 163 706 154 435 341 055 -60 190 Year 3 69 560

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BASIC DATA COUNTRY DATA AA. Inflation AB. Official GDP per capita in USD PROJECT DATA AC. Average total number of staff-years AD. Number of active clients end of year AE. Number of active women clients end of year AF. Average total loan balance in the year AG. Number of loans end of year AH. Average number of loans in the year AI. Average loan size in the year AJ. Total amount of loans end of year with payments delayed with more than 30 days AK. Number of active clients that are saving end of year PERFORMANCE INDICATORS OUTREACH AL. Average number of active clients in the year AM. Average outstanding loan in percent of GDP per capita AN. Percent active clients saving AO. Percent women clients INSTITUTIONAL INDICATORS AP. Number of loans per staff AQ. Administrative cost per loan AR. Administrative cost in percent of loan portfolio FINANCIAL PERFORMANCE/PORTFOLIO RISK AS. Operational self-sufficiency AT. Portfolio yield AU. Percent loans in default of more than 30 days Year 1 635 91% 65% 57% Year 1 53 111 26 % Year 1 84 % 35 % 2% Year 2 725 86% 66% 44% Year 2 29 374 88 % Year 2 41 % 31 % 4% Year 3 760 76 % 69% 37% Year 3 33 257 63 % Year 3 82 % 39 % 10% Year 1 11 % 410 Year 1 15 698 398 298 762 856 798 374 7 536 455 Year 2 9% 440 Year 2 36 752 331 391 771 1 220 1038 377 18 523 498 Year 3 13 % 520 Year 3 38 768 268 473 760 1 253 1237 383 48 624 532

COMMENTS TO THE DATA PRESENTED

Outreach indicators The project has increased its outreach to clients in the three years as can bee derived from Average number of clients in the year (AL), but is still small-scale compared to the Micro Banking Bulletin average microfinance institution. It appears to have increased its level of services by providing an increasing number of loans to the same clients rather than increasing number of clients serviced.

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It has gradually provided smaller loans thus likely reaching out to lower income groups, which is confirmed by the decline in Average loan in percent of GDP per capita (AM). The percent of active clients saving (AN) has gradually increased which may serve to illustrate that the outreach of other forms of financial services are also increasing. The amount of savings (as can be noted from the balance sheet) has gradually been declining, thus this important source of finance is not being exploited. In this case it is a voluntary savings scheme, not forced savings as insurance against loan loss and there are no provision for such "insurance" as can be noted from the accounting information were there are no loan loss provisions or reserve (E and P). The percent of women clients (AO) has gradually declined through the years while the number of loans has increased significantly. This observation will need additional information to be explained, especially if it is due to a change in the approach to how the financial products are targeted and/or approach in mobilisation of clients. Institutional indicators The number of staff years (AC) has increased significantly more relative to number of loans (AH) thus the physical productivity, although increased the third year, is still low (AP) and the administrative cost per loan (AQ) remains high (in year 2 as high as the average outstanding loan). The administrative cost in percent of the total loan portfolio (AR) is also high. Thus the project has a need to expand its number of loans in order to achieve better economy of scale (cost efficiency) i.e. improve physical productivity but most of all financial productivity. Financial performance/portfolio risk indicators The operational self-sufficiency (AS) declined substantially in the second year primarily due to a significant increase in other administrative expenditures (G) which were reduced in the third year combined with increased income from financial operations (A) thus improving project financial performance (reduced net operating loss). With a further increase in volume of financial services/number of loans, it may reach operational self-sufficiency (100%) and turn overall consolidated loss (M) into surplus even with further reduction in grants/donations (J). The portfolio yield (AT) is at a high level signifying a high real interest rate compensating for low financial productivity and an increasing default rate (AU). A further deterioration in the volume of loans in default may however put the portfolio at risk, reduce income from interest on loans (A) and thus reduce the prospects of achieving operational self-sufficiency.