Extract of Agreement at Completion Point

Background and the core learning partnership

In 2009-2010, the IFAD Office of Evaluation (IOE) conducted an interim evaluation of the Rural Financial Intermediation Programme (RUFIP) in Ethiopia. The need for the evaluation was identified based on the interest expressed by the Government of Ethiopia in the financing of a second phase of RUFIP. The objectives of the evaluation were to: (i) assess the performance and impact of the programme; and (ii) generate findings and recommendations to guide the Government and IFAD in the preparation of a second phase of RUFIP. ¹

A core learning partnership (CLP) was established for the evaluation comprising IFAD staff, Government officials and partners to provide inputs throughout the evaluation process and to maximise the opportunities for learning from the evaluation. A final learning workshop was held in March 2010 in Addis Ababa, chaired by the Director, Multilateral Cooperation Department of the Ministry of Finance and Economic Development (MoFED).

The objective of this workshop was to take stock of the evaluation findings and to generate inputs for (i) revising the report of the evaluation, as appropriate, and (ii) preparing the Agreement at Completion Point (ACP). The ACP reflects an understanding between the Government of Ethiopia (represented by MoFED) and IFAD (represented by the East and Southern Africa Division) on the main evaluation findings and recommendations, including their commitment to adopt and implement the evaluation recommendations within a specified timeframes.

Main evaluation findings

Implementation progress. The Programme's main implementation results were in accordance with and, in a number of cases, significantly above the targets established at appraisal, with most key objectives being met or exceeded. However, there were issues related to procurement which caused delays in training and capacity building. Overall achievement of the RUFID has been rated as satisfactory.

Salient results achieved by the programme

Microfinance institutions. The programme has supported the significant MFI expansion. As of mid-2009, 26 MFIs are now operational (with 19 benefiting from RUFIP assistance) with 2.2 million active clients (representing 147 per cent of the appraisal target and 14.4 per cent of Ethiopian households).

Financial outreach data of the MFI sector has also been significant, as exemplified by a 14-fold increase in the United States Dollar (US$) of the value of loans outstanding over the life of the programme and an increase in average loan size, from Birr 550 to Birr 2,085. Savings mobilization has also grown, albeit at a less impressive pace, from Birr 129 million at appraisal to Birr 1.58 billion at end December 2008, with the average savings balance per active client growing from Birr 260 to Birr 710 over the same period.

MFI regulation and supervision. The programme has provided support to the Micro Finance Supervision Division (MFSD) of the National Bank of Ethiopia (NBE), which now carries out regular supervision exercises of MFIs. NBE has also drafted new microfinance legislation building upon its experience and international best practices.

MFI credit funds. At the time of appraisal, some US$51.5 million was allocated as a credit line for MFIs, comprising US$14.4 million from IFAD, US$21.1 million from AfDB and US$16.0 million from DBE and other commercial banks. This represents approximately 60 per cent of the total programme budget. By June 2009, disbursements from RUFIP represented over 11 per cent of the total outstanding portfolio of MFIs under RUFIP. RUFIP has also acted as a catalyst, as MFIs have also mobilized approximately Birr 1.3 billion (approximately US$100 million) from the commercial banking sector.

MFI institutional development and capacity building. These activities have had a mixed implementation record. Supply of vehicles and computers to implementation partners, support to the AEMFI, development of training modules, training of sub-branch level staff and MFI Board members, staff exposure visits and savings mobilization have achieved positive implementation results. Other activities, such as diversifying ownership, client education, product development, MFI staff training and improving MIS have performed less well, mainly due to delays in procurement. RUFIP supported a comprehensive training needs assessment which resulted in the preparation of detailed training modules. Despite implementation delays, RUFIP has trained well over 3 000 MFI staff with the support of AEMFI, which was able to mobilize alternative funding sources to help carry out the training programmes.

Rural savings and cooperative sector. Allocation to institutional development and capacity building is the only subcomponent of the financial cooperative sector to which funds have been disbursed, as RUSACCOs could not meet the RUFIP criteria to access credit funds, as established jointly with stakeholders. The subcomponent was estimated at appraisal at 87.72 million Birr (US$9.19 million). Total requests during the five-year period, increasing from Birr 8.0 million in PY1 to Birr 2.3 million in PY5, amounted to Birr 50.71 million. Two years before completion, only Birr 22.7 million had been disbursed, i.e. 25.8 per cent of the allocation and 44.7 per cent of requests.

RUSACCO outreach. By the end of PY5, 2,529 RUSACCOs (113 per cent of the appraisal target) had been established. Total membership reportedly is 183,649 (205 per cent of the appraisal target), who are all shareholders and savers; the average size is 73 members. This includes 651 women's RUSACCOs (271 per cent of appraisal target) with 24 096 members (251 per cent of appraisal); and an average of 37 members compared to 85 members in all-male and mixed RUSACCOs. Forty-nine per cent of the members of the RUSACCOs are female, a result of special efforts under RUFIP to include women. Ninety-six per cent of the RUSACCOs are found in the most populous original four implementation areas.

Internal resources. The financial operations of the RUSACCOs are entirely self-financed. As of June 2008 the total reported amount of member savings is Birr 32.59 million (US$3.33 million), averaging Birr 178 per member (US$18). Total equity is Birr 29.31 million (US$2.99 million), together with savings adding up to Birr 61.90 million. Without adjustment for inflation, total savings are reported as 53 per cent of appraisal estimates, while in constant prices of the year of appraisal they are but a fraction of that amount.

Borrower outreach and credit. 44,894 members are reported as borrowers, or 18 borrowers per RUSACCO and 24 per cent of total membership. ².

Disbursements during the year are given as Birr 56.4 million (US$5.76 million), averaging Birr 1 260 (US$129) per borrower. ³ Loans outstanding are given as Birr 23.7 million (US$2.42 million). Loan amounts are below the actual demand which RUFIP set out to satisfy. Anecdotal evidence collected by the Mission points to an average demanded loan size of Birr 5 500, the equivalent of two oxen (double or triple the price of a few years ago). RUSACCOs have reacted to the credit crunch by lowering loan sizes and shortening loan periods. These unfavourable loan terms are given as the main reasons for the lack of growth in membership and for dropping outs. Due to weaknesses in the reporting system, as noted above, all financial as well as membership data of RUSACCO are unreliable.

Major strengths. The programme has been a relevant and timely intervention, playing a fundamental role in the development of the microfinance and rural credit cooperative sub-sectors in Ethiopia. In particular, it has provided a significant proportion of the rural poor with access to financial services, strengthened microfinance institutions, made it possible for them to expand their outreach as well as building capacities in the overall regulatory and financial sector.

Areas for improvement. The most serious issue identified by the interim evaluation is the future sustainability of the RUSACCO network established under RUFIP. The viability of the 2,500 plus RUSACCOs that are currently extant but operating without adequate supervision and technical support is a concern. Given their limited capacities, RUSACCOs have not been able to meet eligibility conditions for accessing RUFIP credit, and therefore their breadth and depth of outreach remain restricted. In parallel to this, a more robust programme management structure should be developed, thereby making it possible to establish a strengthened monitoring and evaluation function to help overcome some of the reporting difficulties that have beset the cooperative sub-sector.

Recommendations

Based on the evaluative evidence and analysis presented in this report, programme performance has been rated as satisfactory, and therefore there is a strong case for the development of the second phase of the RUFIP. The following recommendations on strategic and operational issues should be carefully considered in the design and implementation of the future second phase of RUFIP in Ethiopia.

Recommendation 1: Separate sectoral focus on MFIs and credit cooperatives for future IFAD support in Ethiopia. The performance of RUFIP has been mixed, in that achievements in the MFI sector have been significant, while implementation progress in activities related to RUSACCOs has been limited. IOE understands that both IFAD and the Government of Ethiopia are strongly committed to continued support to the rural finance sector.

In light of this, it is IOE's view that careful consideration must be given to the further development of the MFI and RUSACCO sub-sectors. While both sectors have great potential, albeit with very different strategic requirements, for a possible second phase of RUFIP, IFAD should consider supporting the two sectors independently.

Partners involved: MoFED, IFAD.

Expected timeframe: in the context of the possible second phase of RUFIP, scheduled for presentation to the Executive Board in 2011.

Recommendation 2: Enhancing savings mobilization in the microfinance sector. Given the vast underserved rural market in Ethiopia (estimated at about 85 per cent), one of the major constraints faced by MFIs in broadening and deepening their outreach is shortage of loanable funds. Savings, is one important source of funds and the basis for institutional self-reliance. Since their inception, Ethiopian MFIs have mobilized increasing amounts of savings, yet are still far from exhausting this potential source of funds. This will entail pursuing several different strategies, particularly in terms of expanding outreach:

• Developing new savings deposit products and expanding outreach in savings mobilization efforts among the rural households.
• Ensuring that the attractive deposit rates are offered in order to mobilize deposits while MFIs continue to remain operationally sustainable institutions.

Partners involved: MoFED, IFAD, AEMFI, MFIs and NBE.

Expected timeframe: in the context of the possible second phase of RUFIP, scheduled for presentation to the Executive Board in 2011.

Recommendation 3: Engage in policy dialogue with the Government to facilitate the mobilization of funding for MFIs. There is a huge unmet demand for microfinance in rural Ethiopia. While RUFIP has provided access to funding, continuing to expand outreach of MFIs will require the mobilization of additional resources, either through continued borrowing from RUFIP-type initiatives or through commercial banks. Over the longer term, if the MFI sector is to continue to expand to meet unmet demand for access to rural financial services, RUFIP, in its follow-up phase, should encourage commercial bank lending to MFIs. This would entail policy dialogue with MoFED, and NBE and commercial banks on several issues, including exploring the potential, inter alia, of creating an apex institution for MFIs in the medium to long term which would:

• Mobilize financial resources from domestic and international resources and wholesale such resources to MFIs on a competitive basis; and
• Supervise MFIs on behalf of NBE in accordance with international best practice.
• Assisting in establishing a credit guarantee fund which would make it possible for MFIs to borrow on commercial terms without significant collateral requirements
• Studying collateral substitute mechanisms, including independent ratings of MFIs as currently implemented in other countries.

Partners involved: MoFED, IFAD, MFIs, AEMFI and NBE.
Expected timeframe: in the context of the possible second phase of RUFIP, scheduled for presentation to the Executive Board in 2011.

Recommendation 4: Develop an appropriate regulatory and supervisory system for RUSACCOs. Should the second phase of RUFIP continue providing support for the further development of the credit cooperative network, this should require a system of appropriate regulation and supervision by a financial authority and a fully functional operating and reporting system, as well as the complementary institutional capacity building functions that this would require.

The new programme could build upon the significant international experience which exists by establishing a partnership with an institution with a recognized track record in credit cooperative system development. This would then make it possible to leverage international technical assistance in credit cooperative system development (recognized centres of excellence in this field include, DGRV, WOCCU and Rabobank, amongst others), complementing financial assistance by IFAD. The exact course of action would be determined by the Government in consultation with the international technical assistance partner, stakeholders in the credit cooperative sector and IFAD.

Partners involved: MoFED, IFAD, FCA, RUSACCOs and their unions.

Expected timeframe: in the context of the possible second phase of RUFIP, scheduled for presentation to the Executive Board in 2011.

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1/ In line with the Evaluation Policy, it is mandatory for IOE to conduct an interim evaluation before IFAD can finance a subsequent phase of any project/programme.

2/ Not all RUSACCOs may have taken up lending; but this is not documented.

3/ Anecdotal evidence collected by the mission yielded average loan sizes mostly around Birr 1,200, and in one case of as much as Birr 3,300. Numbers of borrowing members ranged from 35 per cent to 80 per cent, which is far above the reported average.