Appraising Microfinance Institutions

01 December 2008

Appraisals are an integral part of the funding process. Appraisals (also commonly called due diligence) help funders to determine the capacity of microfinance institutions (MFIs) and to make decisions related to capitalizing an MFI or providing support for technical assistance. Information obtained as part of an appraisal process helps funders make decisions on funding levels, funding instruments, and the overall structure of a deal.

CGAP’s Appraisal Guide for Microfinance Institutions offers one approach to conducting an appraisal. It is a comprehensive guide for organizing, implementing, and finalizing an MFI appraisal that can be adapted to the needs of a range of donors and investors. The Guide was updated in 2008 to reflect the latest trends in the industry. It incorporates the latest microfinance knowledge and good practices to form a detailed roadmap that analysts can use to evaluate MFIs. The updated Guide includes new sections on savings, poverty outreach, information systems, and risk management.

Appraisal Guide for Microfinance Institutions promotes an industry standard for appraisals and is available free to funders, consultants, and others undertaking appraisals. While appraisals can take many forms and shapes, the Appraisal Guide serves as a one stop-shop and an easy reference tool. It contains detailed instructions, probing questions, and data input templates to support both qualitative and quantitative analysis.

Funders can use all or portions of the Appraisal Guide as needed. The reports produced can be used to help donors and investors assess the structure, strategy, and financial and social performance of an MFI. Using the Appraisal Guide helps funders do the following:

  • Understand the vision, direction, health, and stage of development of MFIs.
  • Assess MFIs’ needs and capacity to absorb funds and identify areas of potential support, thus promoting more effective and efficient use of donor and investor resources.
  • Establish baseline information to help with performance-based funding management.

Appraisal Guide for Microfinance Institutions is primarily for funders and the consultants they hire to analyze MFIs. It calls for a lot of detailed analysis because it is designed to be used with relatively mature MFIs (for example, MFIs that have more than 3,000 clients). It can be useful to a wide range of funders, including bi- and multilateral development agencies, foundations, and nongovernmental organizations that are considering funding or conducting ex post evaluations. The Guide can also inform or complement other due diligence systems investors are already using. Finally, it also can be used by MFIs to conduct self-evaluations.