SmartAid for Microfinance: Innovative Index Promotes Accountability and Change

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Dec 2009
Washington D.C., United States, December, 09 2009 - Funders’ commitments to microfinance have increased by 24% over the last year. But with growing popularity, microfinance is also facing more scrutiny. Probing questions center around microfinance’s impact on poor people, contribution to economic growth, and whether all that money is going to good use.

CGAP’s SmartAid for Microfinance Index is the first index that measures and rates how funders work in microfinance. It is not easy to assess the effectiveness of microfinance funding, given the long delivery chain from funders’ headquarters, where projects are designed, to their implementation on the ground. SmartAid focuses on the part of this chain that funders can most directly influence: their internal management systems.

“The need for independent evaluation, benchmarking, and standard-setting has never been greater in the field of development,” says CGAP expert and SmartAid technical lead Alexia Latortue. “What is unique about SmartAid is that it offers funders a rigorous external assessment and provides a framework to share lessons across a diverse group of funders. When funders can see where their peers do well, they can learn from each other and see how they can better work together.”

This year, eleven funders threw open their doors to find out if they are properly equipped to provide funding and technical assistance for microfinance. The results show there is still room for improvement. While no funder was “inadequate” in its support of microfinance, none received the highest rating of “very good” either.

The good news is, all participating funders are embracing change and transparency in an effort to become more effective in supporting microfinance. And that’s the most important place to start.

What is SmartAid?

The SmartAid for Microfinance Index grew out of a demand from funders themselves. In 2006, the heads of 29 development institutions together with CGAP pioneered an index to rate funders by the effectiveness of their management systems. The SmartAid for Microfinance Index analyzes funders’ systems along five areas that were found to be critical for effective aid delivery: strategic clarity, staff capacity, accountability for results, knowledge management, and appropriate instruments.

A pilot SmartAid round was conducted in 2007 with seven funders, and the positive results encouraged a larger group of 11 funders, including development finance institutions (AECID, AFD, IFC, MIF), multilateral agencies (AfDB, EC, IFAD, ILO, UNCDF), and bilateral agencies (GTZ, SDC) , to participate in the 2009 SmartAid Index. Together these funders represent more than 50 percent of cross-border funding to microfinance.

Participating funders receive a report that details their strengths and weaknesses, highlights examples of good practices, offers recommendations, and provides an overall score. The Index seeks to provide incentives for funders to take action, prioritize changes, and hold themselves to account for their own performance.

The 2009 Results

The results to date show some consistent patterns of strengths and weaknesses across funders. In general, funders scored best on strategic clarity, followed by appropriate instruments. The lowest scores were in the category of accountability for results. “The high scores on strategic clarity reflect wide-spread progress in defining a common vision for microfinance and basic good practice principles for microfinance,” says Mayada El-Zoghbi, CGAP expert and member of the SmartAid team. “But translating good strategies and policies into practice is much more difficult. And that’s where the Index allows us to pinpoint the pressure points and helps participating institutions identify solutions.

Some agencies find it hard to even identify all of their microfinance projects, much less assess their effectiveness. There is far too little information available on the performance of projects or investments made, and relationships with partners are not structured to incentivize performance. “This means that funding can continue regardless of performance,” says Barbara Gähwiler, another member of the SmartAid team. “Without knowing the performance of its microfinance portfolio, an agency cannot manage it effectively and important lessons from past experience are lost. What’s more, the industry still has a long way to go to develop indicators for tracking the performance of support to the market infrastructure and policy levels.”

Having an impact – already

As a result of their experience with the Index, funders are making significant improvements in their systems. Changes range from reorienting strategic focus, upgrading staff skills, and revamping monitoring and evaluation systems. Managers of the participating agencies say that SmartAid often hastened a process of change that, in some cases, was underway but needed additional impetus.

According to Cornelia Richter, Director General of Planning and Development for GTZ, SmartAid is already bringing about change in their organization: SmartAid has prompted GTZ to externally evaluate its entire microfinance portfolio. “I think this is very remarkable progress,” says Richter, “which has been to a large extent triggered by SmartAid.” Richter says that SmartAid helped GTZ take action in areas it was aware needed improvement. “For example,” she says, “We were working with monitoring systems before, but we weren’t doing it in such a systematic and strategic way and now there is much more pressure on this.” Which is exactly the kind of effect SmartAid was designed to produce.



Source : CGAP
 

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