SmartAid for Microfinance: Innovative index promotes accountability and change

November 15, 2009    

It’s not just about more money for development, it’s about using that money effectively. With the amount of global development assistance at an all time high, and poor people reeling from the effects of the triple crises of 2008-2009 – food, fuel and financial. From Afghanistan to Africa, the world is asking, what are the results?

Microfinance is no different. US$14.8 billion was committed to increasing access to finance as of December 2008, and that number is poised to increase. 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. This year, eleven brave funders threw open their doors and agreed to find out if they are indeed 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?

In 2006, the heads of 29 development agencies together with CGAP decided to pioneer a new index to rate funders by the effectiveness of their management systems. The SmartAid for Microfinance Index analyzes funders’ systems along five areas of effectiveness: strategic clarity, staff capacity, accountability for results, knowledge management, and appropriate instruments. Nine indicators spell out what is needed for effective management in these areas. SmartAid enables funders to understand how their systems, policies, procedures, and incentives affect their work in microfinance. It does not, however, evaluate the quality of programs on the ground.

“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.”

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.

Who participated?

CGAP piloted the SmartAid Index with seven funders in 2007. Eleven funders joined the 2009 round: AECID, AFD, AFDB, EC, GTZ, IFAD, IFC, ILO, MIF, SDC, and UNCDF. Together, this group represents more than 50 percent of total cross-border funding to microfinance. This diverse set 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.

“Good performance on SmartAid’s indicators can take different forms for different agencies,” says Latortue. “Systems that work for tracking and monitoring the performance of programs and investments in a small, centralized agency, for example, will not be appropriate for a large, decentralized agency. Size, level of centralization, and strategy all matter. But the indicators being measured present a standard appropriate for all types of donors and investors.”

The 2009 Results

The 2009 round of SmartAid will serve as the baseline to chart funders’ progress in the future. Overall, funders are assigned a general assessment of their performance: very good, good, partially adequate, weak and inadequate. “This year, five funders scored in the good category, four were found to have partially adequate systems and two were found to be weak,” says Latortue.

Strong strategic clarity
Funders performed best in the areas of strategic clarity and appropriate instruments. “There has been amazing progress across different funders in the past six years,” says CGAP expert and member of the SmartAid team Mayada El-Zoghbi. “Before, funders had radically different and even divergent notions of what microfinance is. But today, there is common ground in viewing microfinance as an integral part of the financial system to serve a range of poor people with diverse and quality financial services.”

Room for improvement: Accountability
When it came to accountability, funder performance tended to yield lower marks. “Putting the proper systems in place to actually implement new and better practices is not an easy task, nor one that happens overnight,” says El-Zoghbi.

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

Though it’s still early days, SmartAid is already getting results. “SmartAid is spurring ambitious action plans for implementation internally and collaboration among participating funders,” says Latortue. “One agency shared their SmartAid results and reform plans with parliament, another immediately started recruiting for specialist staff to shore up their technical capacity, and yet others organized exchanges to tap into the specific knowledge management skills of another agency.”

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.