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«Background The SmartAid Index measures and rates the way funders with an interest in microfinance work. Heads of 29 major development institutions ...»

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The SmartAid Index measures and rates the way funders with an interest in microfinance work. Heads of 29

major development institutions endorsed CGAP’s development of the Index. 1

The premise of SmartAid is simple: funders with strong management systems are better equipped to

support financial inclusion effectively. Its indicators assess five areas agreed by all funders as critical for effective financial inclusion: strategic clarity, staff capacity, accountability for results, knowledge management, and appropriate instruments.

SmartAid enables funders to understand how their systems, policies, procedures, and incentives affect their work in financial inclusion projects. As an independent, external assessment, the Index highlights strengths and areas for improvement. It can also provide an impetus for funders to take action, prioritize changes, and hold themselves accountable for their own performance.

Funders support financial inclusion with the goal of reducing poor people’s vulnerabilities and increasing their incomes. Having the right systems is an essential condition for achieving this goal. SmartAid does not, however, evaluate the quality of programs on the ground.

Five funders— AFD/Proparco, EIF, IFAD, MIF and UNCDF —participated in SmartAid 2013, increasing the total number of funders participating in the SmartAid Index to 19. Prior rounds have included the participation of AECID, AFD, AfDB, AsDB, CIDA, EC, EIB, FMO, GIZ, IFC, ILO, KfW, SDC, and Sida. Three agencies from the 2013 round participated in prior SmartAid rounds (IFAD, MIF and UNCDF). AFD/Proparco and EIF are both considered new participants because in prior rounds different units within the agencies participated. 2 This diverse group of funders includes development finance institutions focusing mainly on mature retail institutions, large multilateral development institutions that make sovereign loans to governments, and bilateral and multilateral agencies that primarily provide grants.

The Index presents a standard appropriate for all types of donors and investors. However, good performance against the indicators can take different forms for different agencies. Systems that work can look radically different across funders, based on numerous factors including size, level of centralization, and strategy.

1 See the Better Aid for Access to Finance meeting, 2006.

2 In the case of AFD/Proparco, AFD participated in the 2009 round and the submission did not include Proparco. For EIF, two departments of the EIB Group’s Directorate of Operations – Africa, Caribbean and Pacific region, and the Mediterranean region—participated in the 2011 round and did not include EIF.

Key Findings UNCDF received a score of 84 out of 100, meaning that At a Glance overall it

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UNCDF provides investment capital and technical advisory services to support development in the least developed countries (LDCs). Established by the General Assembly in 1966 and with headquarters in New York, UNCDF is an autonomous UN organization affiliated with UNDP. UNCDF has remained concentrated on two distinct business lines: microfinance (the financial inclusion practice area, or FIPA) and local development. FIPA manages a country program portfolio and global thematic initiatives on the South-South expansion of microfinance institutions (MicroLead), financial services for youth (YouthStart) and, more recently, Mobile Money, Clean Energy and the Better Than Cash Alliance. UNCDF continues to count on strategic partnerships to expand its portfolio and develop new initiatives, e.g. on microinsurance with the ILO and on remittances with IFAD. Recent developments include the adoption of a revised results framework (in preparation for the portfolio review) and a Corporate Gender Strategy Framework that is consistent with FIPA’s client focused approach. UNCDF’s small size and well-conceived procedures provide it with the necessary agility to fulfill its mandate.

SmartAid Index 2013 2 UNCDF has taken significant steps to implement recommendations from the SmartAid 2011 round including conducting a full portfolio review, expanding its staff, and strengthening its performance based elements in loan agreements. At the same time, UNCDF has continued to grow in complexity but has not yet sufficiently kept quality assurance and knowledge management functions in line with this growth.

Key Strengths and Weaknesses Strategic Clarity (4.1/5.0). UNCDF continues to build on its strong set of policies to support inclusive  financial systems. Its strategy, which is endorsed by management, focuses on its role to provide catalytic capital and adding value. Its strategic guidelines and procedures are solid as it provides clear guidelines for staff. For instance, the guidelines on additionality that are applied as a check for each SmartAid Index 2013 3 program buttress this point. An early leader in promoting an inclusive financial sector paradigm, UNCDF has embraced an ambitious market development approach. This has been strengthened by the development and pilot testing of its Making Financial Access Possible (MAP) diagnostic and implementation tool, which has considerable potential to significantly contribute to building inclusive financial markets, building synergies between UNCDF country programming and global thematic initiatives and contributing to UNCDF’s value added. Additionally, the new Gender Policy contributed to greater strategic clarity, evidenced by changes to the Corporate Management Plan.

FIPA now works in 28 LDCs, having slightly expanded its geographic focus. Moreover, FIPA is a tight unit with the ability to control its strategic directions and its systems. Its global thematic initiatives are timely and evaluated for relevance to LDCs, the comparative advantage of FIPA, and capacity to implement. Despite strong strategic clarity within the FIPA team, there is a concern that insufficient flexible core resources may dampen momentum, disrupting the balance between meeting key priorities and the interests of funders. The multiplication of thematic initiatives over the past few years, each with dedicated funding, heightens the need for vigilance to ensure matching interests.

Quality Assurance (4.3/5.0). UNCDF’s quality assurance function is embedded in the job description of  most, but not all, key staff. Even though the Chief Technical Advisors (CTAs) lead the sector work and thematic programs implemented in each country, they can also rely on thematic programme managers, regional office and headquarter staff for quality assurance. Moreover, the comments of technical specialists, which are binding, must be incorporated before the program document can be submitted for final approval to the Program Appraisal Committee. UNCDF’s quality assurance function is strengthened by the use of Performance Based Agreements and review by CTAs, Regional Technical Advisors (RTAs), global thematic Programme Managers, and FIPA management. However, a combined decentralized and global quality assurance system presents the concern that ultimate oversight and responsibility remains somewhat fragmented. Furthermore, there is no specific methodology or guidelines to assess financial intermediaries that UNCDF supports, and the various staff responsible may not share the same level of understanding on the standards to apply for quality assurance during project review or monitoring.

Staff Capacity (4.2/5.0). UNCDF has taken steps to strengthen its staff capacity by recruiting 17 new  specialist staff, increasing the total FIPA staff to 50. The Headquarters team is also very strong, with 13 staff members focused on providing strategic and technical guidance. Nonetheless, given the rapid growth of new programs, staff may still be overstretched, particularly at the level of Country Technical Advisors. UNCDF has streamlined processes to recruit Country Technical Advisors (CTAs) in order to reduce the gap in time between program approval and staff deployments. Furthermore, with its simplified procurement policies, UNCDF can easily recruit external consultants. With learning considered to be an important dimension of human resource development, UNCDF can justifiably be called a “learning organization” given that training budgets are built into program budgets at all levels.

Project identification System (4.5/5.0). UNCDF has a strong system to identify all stand-alone  microfinance projects. With the use of the Atlas system, UNCDF can automatically generate a list of its entire microfinance portfolio at any time. This practice strengthens quality assurance. However there is no mechanism to capture the amount of grant funding requested by FSPs to finance loan portfolios, requiring additional staff oversight. Beyond its own system, the role of FIPA in the project appraisal and monitoring process is embedded in UNCDF’s operations manual. As a result, FIPA is involved in any SmartAid Index 2013 4 financial services component within the Local Development practice area. There are no financial intermediation components in the local development operations at this time.

Performance Indicators (4.2/5.0). Through its partnership with the MIX in 2011 - 2012, UNCDF made  significant efforts to upgrade monitoring systems and analysis of performance indicators, providing real-time data to access, track and monitor the portfolio. As a result, the score on this indicator increased by 0.2 points since SmartAid 2011. The MIX Gold upgrade introduced a new set of indicators with quarterly reporting and migrated data on 89 FSPs from the old system (Financial Inclusion Online (FIOL)) to MIX Gold Premium. Preparation of new portfolio analysis reports became a requirement, reflecting the changed role of UNCDF from “data chaser” to “data analyzer.” The MIX Gold upgrade has also meant progress in the integration of social performance indicators. However, the existing reports cluster FSPs geographically. Given the diversity of partners this has somewhat limited analytical value.

Re-grouping by institution type may allow for comparison with the relevant MIX peer groups.

With a new system that centralizes performance indicators, UNCDF is in a position to enable staff to analyze the challenges of performance, not the challenges of data accuracy. FIPA has also introduced PAMIRA Banker loan software to manage its small loan portfolio, with mandatory indicators in its performance-based agreements. FIPA is currently addressing the challenge of integrating client protection indicators and has started to use indicators for its support to policy level work. This is an important area for UNCDF given its increasingly important global role in policy work, housing the office of the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development (UNSGSA).

Performance-based Agreements (4.1/5.0). UNCDF has made progress in strengthening performance based agreements (PBAs). UNCDF’s performance-based agreements incorporate standard indicators for performance targets, with clear conditions for disbursements. Operational guidance clearly stipulates the responsibilities of FIPA staff regarding monitoring and enforcing performance of its partners.

Monitoring of compliance with PBAs is now included in portfolio analysis reports. UNCDF has also developed and updated its loan policy to guide the issuance of new loans: using performance based targets in all loan agreements with reporting requirements on targets, tranching of disbursements, and clear consequences of non-payment of loans. FIPA has a strict system of blocking payments for FSPs that are non-compliant and requires documented justification for exceptions. Guidance is provided on when to suspend, terminate or approve on a waiver basis. Two PBAs signed for programs in Rwanda (with the National Bank and with a microfinance association) serve as models for future PBAs at the policy and meso levels. However, the expansion of the use of performance based loans is a work in progress. UNCDF’s score on PBAs increased by 0.2 points since SmartAid 2011.

Portfolio Reviews (4.5/5.0). UNCDF recently conducted a thorough portfolio review and formulated an  action plan to implement the findings of the review. A review of MicroLead was also recently conducted and many of the recommendations in that review have already been acted upon. Since SmartAid 2011, UNCDF’s score on portfolio reviews increased substantially by 0.6 points to 4.5, which is the highest score achieved so far on this indicator in all SmartAid rounds. Compliance with good practice, additionality, and the quality of management inputs were all key areas of focus in the 2012 portfolio review. The portfolio review findings have been widely disseminated, including a debriefing session with all UNCDF staff by the Independent Evaluation Office. UNCDF should leverage the strength of its external portfolio review by applying an adapted methodology in its internal reviews.

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