Innovative Lending Instruments in Microfinance – Lessons from the Africa Region Finance Forum 2004 – September 24, 2004 Workshop on Microfinance Operations Koro Ouattara - AFTFS Africa Region -World Bank

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 1 Adaptable Program Loan: APL – General Features APLs are used: –When sustained changes in institutions, organizations, or behavior are key to successfully implementing a program; –To support a phased program of sector restructuring, or systemic reform in the sector where time is required to build consensus. –For a series of loans that build on the lessons learned from the previous loan(s)

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 2 Adaptable Program Loan: APL – General Features APL involves agreement on: –The Phased long-term development program to be supported by the loan –Sector policies relevant to the phase being supported –Priorities for sector investments and recurrent expenditures –Triggers for when to move to next phase

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 3 Why an APL for Madagascar Microfinance? Reasons for Madagascar APL: –Long term Capacity building commitment needed to build financially self-sustainable institutions –Support systemic reform in the microfinance sector where time is required to build consensus –Focus on program ultimate objective which is long- term in nature

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 4 Madagascar Microfinance APL Project Background Project Data: –IDA credit amount: US$16.4 million –Board Approval: May 20, 1999 –Effectiveness date: October 28, 1999 –Closing date: December 31, 2005 –Number of extensions: 1 –Implementing agencies: Central Bank of Madagascar and AGEPMF is PIU

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 5 Madagascar APL -Project Description and Objectives The microfinance project : –Project is phase 1 of a 15 year APL microfinance program divided in 3 phases of 5 years each. Objectives of Phase 1 of Project –Provide access to financial services to low-income Malagasy by building sustainable microfinance finance institutions (MFIs) and adoption of an appropriate legal and regulatory framework.

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 6 Madagascar APL Project Other Phases Phase 2: Support the consolidation of Savings and Loans Associations (SLAs) by expanding coverage in the areas where they are established, and, if feasible, achieving penetration into other areas to reach a sustainable scale and cost structure; and implementation of the microfinance training program. Phase 3: support strengthening of the financial core of SLA networks and its evolution into full-fledged self- sustainable financial institutions.

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 7 Madagascar APL - Project Phase 1 Components Project components (4) –Improve legal and regulatory framework for microfinance –Develop capacity of MFIs –Build skills in microfinance with national training program –Undertake studies including audits and impact studies

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 8 APL1 Project Achievements in Legal and Regulatory Component Strenghtening of legal and regulatory framework –Law for savings and loans associations (SLAs) –Management and Prudentiel rules for SLAs –Draft law for all MFIs Capacity building at Central Bank of Madagascar –Creation of a microfinance supervision unit –Training and field visits for Central Bank staff

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 9 APL1 Achievements in Scaling up Microfinance Institutions (MFIs) Performance indicators as of 12/31/2003: –Number of MFI networks: 4 –Number of retail MFIs: 130 –Membership: 98,695 –Savings: Fmg billion (US$9.544 million) Loans outstanding: Fmg 33.5 billion (US$5.1 million)

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 10 APL1 Achievements in Scaling up Microfinance Institutions (MFIs) Performance indicators at beginning (12/31/1999 –Number of networks: 2 –Number of retail MFIs: 59 –Membership: 22,818 –Savings deposits: Fmg 8.3 billion –Loans outstanding:Fmg 5.5 billion

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 11 Scaling up of MFIs - Membership Growth Membership growth of MFIs in the project: 332%

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 12 Scaling Up of MFIs – Savings Deposits Growth in Savings deposits: 300%

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 13 Scaling Up of MFIs – Credit Growth Growth in Credit: 1,025%

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 14 Scaling Up of MFIs – Sustainability Operational Self-sufficiency: 65% - 93% Factors that can affect viability and sustainability of MFIs: –MIS System –Meeting Central Bank reporting requirements –Governance Structure –Cost of managing network and ability to cover those costs with revenus

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 15 Madagascar APL – Next Steps APL2 & 3 to reach15-year Program Goals: –Effective supervision of Licensed MFIs –Implementation of appropriate law and regulations –Centralization of Services to MFIs: Inspections (auxiliary supervision?) & “ back office ” activities –Automatization of MFI activities –Consolidation of networks, expansion and greater outreach.

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 16 Madagascar APL- Lessons Learned APL still best instrument for project because: –Institution building of MFIs until sustainability is long term process by experience –Law and regulations in microfinance are new and slow to put in place –Building of supervisory capacity is long and tedious –APL phases allow to take stock and make adjustments before moving forward –APL2&3 still needed to reach ultimate goals.

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 17 Learning and Innovation Loan (LIL) - General Features LIL Focus on: –Experimentation –Learning and Piloting for development solutions LIL Design Features: –Size of loans limited to US$5 million –Prepared and approved in 6-9 months –Implementation period of 3.5 years

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 18 Features of Tanzania LIL Experimentation in microfinance Narrow focus on regulatory framework Complement of other donor activities Seize Comparative Advantage of Bank Small loan size of US$2 million Was originally a component of a complex project

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 19 Tanzania Rural and Microfinance Project – LIL Background Project Data of Tanzania LIL: –IDA Credit amount:US$2 million –Board Approval:08/26/99 –Effectiveness date:06/15/2000 –Closing date:12/31/2004 –Number of extensions:2 –Implementing agency:BOT (Bank of Tanzania)

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 20 Tanzania Rural and Microfinance LIL- Objectives Project Objectives –Development of a common policy framework based on internationally recognized best practices –Establish an enabling environment for rural and microfinance in Tanzania and increase the quality and returns of investment in the sector

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 21 Tanzania LIL- Project Components 1.Development of a National Microfinance Policy 2. Design of legal and regulatory framework for microfin. 3. Provision of operational guidelines for Gvmt and Donor support in microfinance sector. 4.Capacity building at Directorate of Microfinance at the Bank of Tanzania and at Ministry of Cooperatives for supervision. 5. Knowledge and Skills enhancement in Microfin Sector

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 22 Tanzania LIL - Achievements Project Achievements: –Adoption of National Microfinance Policy –Law on microfinance companies –Adoption of Regulations for microfinance –Database on microfinance organizations in Tanzania –Operational Guidelines for Saccos (in progress) –Guidelines for donor support (in progress)

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 23 Tanzania LIL-Scaling Up Probable Impact of Enabling Policy and Regulatory Environment: –Scaling up of microfinance NGOs –Scaling up of SACCOS –Creation of new microfinance companies –Downscaling of banks into microfinance

Madagascar Microfinance APL and Tanzania Rural and Microfin LIL 24 Tanzania LIL- Lessons learned of Operational Relevance LILs can be used in all sectors LILs can be used to address policy issues LILs are as expensive to supervise as standard investment loans LILs can require a long period of implementation TZ LIL experience to be captured by QK