Background and introduction

IFAD has been involved in the Central and Eastern Europe and Newly Independent States (CEN) region since the early 1990s, following the start of the political and economic transition process which continues to characterise the region to this day. This is demonstrated by the 18 projects for a total value of approximately USD 192 million¹ which have been approved and are being implemented. The establishment and promotion of rural financial services initiatives, including the provision of credit, savings and other associated services has figured heavily in the IFAD programme in CEN countries.  

Given the relative importance of the rural financial services activities, the decision was taken to carry out a Thematic Evaluation of the rural finance activities financed by IFAD in the Region. Four of the eight countries with active programmes in the Region were selected, taking into account the nature of the portfolios, including the weight of financial services components, implementation status, and highly concessional borrowing status: Albania, Georgia, the Republic of Moldova and Romania.

The main objectives of the Thematic Evaluation were to: (i) thoroughly analyse the demand and supply sides of rural finance in the specific context of IFAD projects in four of the eight countries in the CEN Region; (ii) assess the relevance and effectiveness of IFAD's approach in support of financial services in these countries; and (iii) based on this analysis, on the IFAD Strategic Framework 2002-2006 and the Sub-Regional Strategy for the CEN Region, formulate recommendations for strategy, design and implementation of future IFAD-financed interventions in the rural finance sector in CEN countries.

This Agreement at Completion Point (ACP) is a distillation of the main findings and recommendations of the Evaluation, and has been agreed by the members of the CLP² .

Overview of major findings

The findings of the Thematic Evaluation are reflected through: (i) the four Country Background Reports that contain a relevant analysis and primary data collected by the missions which visited the four countries; and a (ii) Synthesis Report which contains the major findings, conclusions and recommendations made by the Thematic Evaluation.

Evolution in the nature of the IFAD portfolio.  There is a clear evolution in the nature of the IFAD portfolio in the Region, with early interventions co-financed in partnership with the World Bank being gradually replaced by a second generation of IFAD-initiated and financed projects, with an increasingly focused development orientation to meeting the needs of the rural poor. The second generation projects also show, on average, a sharpened focus on rural financial services development and delivery.

Partnerships. As mentioned in paragraph ¿0 above, IFAD's first generation projects were co-financed almost exclusively with the World Bank, while follow-up projects have been co-financed with a variety of international agencies and bilateral donors, including the OPEC Fund, DfID, SIDA and SNV (the Netherlands). This does not include a variety of potential co-financing partners currently operating in the region. IFAD has not, for example, partnered with other organisations that have been prominent in the development and/or reform of the formal financial sector, including EBRD and KfW. This is, partly at least, the result of the vastly different funding cycles, operating modalities and strategic focus of these institutions.

Institutional options. The work of the Thematic Evaluation has illustrated the three broad categories of institutional options for rural financial services development in the Region: (i) formal financial sector – commercial banks; (ii) non-banking financial institutions; and (iii) member-owned institutions.

Commercial Banks offer the advantage of being well-established, usually with an extensive branch network and subject to central bank supervision. They are also in a position to provide, in addition to access to loans, a full range of financial services, ranging from money transfers to current accounts and cheque facilities, which are often of great importance to rural customers. Furthermore, lending products can be easily diversified by commercial banks with access to different terms and foreign exchange as well as domestic currency facilities, making it possible to offer different customers financial products well suited to their specific needs. The disadvantages to working with commercial banks relate to the relatively high operating costs and especially to the difficulty to ensure a focus on the traditional IFAD target group of the rural poor.

Non-bank financial institutions (NBFIs) is a broad category covering institutions that could graduate to commercial bank status in the future (an example would be the IFAD-financed Mountain Areas Finance Fund – MAFF – in Albania) as well as ‘financial service' providing NGOs and microfinance institutions.  Member-owned institutions are member-owned and governed institutions that are usually proximity based, offering a decentralised management structure, and tend to be smaller institutions based on a participatory grassroots approach to the provision of small-scale financial services (the development of the Savings and Credit Association – SCA – network in Moldova being a prime example).

NBFIs and member-owned institutions face a number of similar opportunities and challenges. They offer relatively similar services, usually starting out through the provision of small-scale loan programmes and gradually developing a series of complementary services for their client base, with both institutional types relying on a proximity based, low-cost operating structure. The main drawback for these institutions is the nature of the legal framework, which either does not exist or is incomplete, making it difficult, if not impossible, for these institutions to develop over the short to medium term.

Given the instability of the financial sector early in the transition period and the immense losses which the general population was forced to bear following bank collapses (the Albanian pyramid schemes being the one example), central bank regulators often remain very hesitant to allow these types of institutions the ability to mobilise savings. Being barred from attracting savings makes it difficult for them to become self-sustaining, and forces them to rely on regular capital injections (on either a grant or heavily subsidised basis) from donors and revolving credit funds as quickly as possible to ensure some level of profit-making.

Project management and supervision issues.  A development oriented rural finance initiative requires monitoring and evaluation of relatively few key performance indicators: disbursement performance vis-à-vis the target group, repayment/arrears performance (including ageing), service costs for the institution and transaction costs for clients. A portfolio management system based on these indicators should provide the input for supervision of the implementation of the rural financial services activities foreseen at project level. A basic set of key performance indicators, as well as other major issues of importance to IFAD (including gender, targeting and outreach) should be spelled out clearly at design of the M&E systems and agreed upon with the Cooperating Institution and built into the TORs of supervision missions. The RIMS system adopted recently by IFAD will go a long way in achieving this.

Development of relevant lending products for the IFAD target groups.  Broadly speaking, short-term credit is readily available through a variety of institutional mechanisms through the CEN region. What is clearly lacking however, are adequate medium and long-term loan products, which would help meet one of the greatest needs of the poor rural population – access to financial services which would allow them to recapitalise firms and modernise infrastructure which have suffered from over a decade of inadequate investment.

Collateralisation of lending. The need to develop medium and long-term lending products is also tied to the complex issue of collateralisation of lending, and especially to the difficulties in the valuation of land for use as collateral. Along with private commercial banks' perception of rural lending as inherently risky, this is probably one of the most serious constraints to the development of longer term financial products more in line with the needs of the IFAD beneficiary group.

Recommendations

Enhancing partnerships. Efforts should continue to be made to widen the scope of partnerships and co-financing arrangements with other stakeholders involved in rural financial services activities in the Region. Communications between IFAD and prominent regional institutional players in rural finance need to be enhanced, and PN (possibly in collaboration with PT) should explore potential for establishing learning and partnership links with active donors, commercial banks, microfinance institutions, NGOs and CSOs.

PN should continue to focus on expanding partnership and co-financing arrangements with international and bilateral donors, as well as with NGOs and CSOs in the region.
Follow-up action – PN Division.

Improving implementation performance. As highlighted above, the effectiveness of monitoring and evaluation as an important management tool for improved implementation would be heightened with the inclusion of a standard set of key performance indicators in all projects. This should implemented in all Subsidiary Financing Agreements, as well as being integrated as a standard review activity in all CI supervision missions. Furthermore, performance should be evaluated by the Borrowing Government and IFAD through Project Units, supervision and follow-up mission,

A set of key performance indicators should be included in all M&E systems as well as Subsidiary Financing Agreements and as a standard review activity in all CI supervision mission. Adequate sanctioning mechanisms for participating financial institutions (PFIs) non-performance should be built into the Subsidiary Financing Agreements.
Follow-up action – PN and OL, with collaboration of PIUs and CIs.

Providing financial services relevant to the entire rural economy supply chain while continuing to support smallholders.  While it is clear that the development of a sustainable rural financial services institutional network in the CEN region will require developing financial products and providing both technical and financial support throughout the entire supply chain – from smallholder to agro-processing units to marketing channels – IFAD must maintain as its main foci the emphasis on supporting the rural poor. This will entail ensuring that, suitable products targeting the rural poor and smallholders are developed within the context of IFAD country programmes in the region. This also requires IFAD to support the development of medium and long term financial products to help capitalise firms and replace obsolete infrastructure and machinery in rural firms.

IFAD should continue to focus on smallholder lending for its traditional target group, along with developing medium and longer term financial products for other beneficiary groups, within an overall strategy to support (both technically and financially) critical actors and activities throughout the entire supply chain in support of rural poverty reduction, in line with its sub-regional strategy.
Follow-up action: PN, with collaboration of PIUs, PFIs and CIs

Ensuring impact of larger SME loans. In line with the sub-regional strategy, the IFAD-financed portfolio in the region is increasingly supportive of medium sized loan products targeting the rising dynamic elements which will form the backbone of the rural economy, generating employment and on and off-farm income generating activities with direct link to the rural poor. Given the uneven capacities in the financial institutions in the region, all SME loan products should be implemented by financial institutions which IFAD is satisfied have the professional skills to assess the loan applications. IFAD should provide, in the context of its projects and programmes, support to develop capacities of participating financial institutions in this respect.

In supporting critical actors and activities throughout the entire supply chain with the ultimate aim of rural poverty reduction, IFAD should carefully assess the capacities of participating financial institutions and provide capacity building technical assistance as necessary.
Follow-up action: PN, PIUs, CIs and PFIs

IFAD specific concerns.  There has been a steady improvement in terms of the IFAD-financed projects' focus on participatory development processes, gender sensitive implementation and pro-poor orientation with the evolution of the IFAD programme in CEN countries. A fundamental element which should receive more attention in the development and design of future projects and programmes is the need to develop a thorough understanding of social conditions in rural areas. This is especially important in the design of small-scale financial services products (as highlighted in paragraph ¿0 above). This will improve design and help avoid the implementation of ‘blueprint' approaches which are not always well-tailored to local community needs and realities.

Small-scale financial services need to be designed following an in-depth analysis of prevailing economic and especially social conditions at the local level.
Follow-up action: PN

Technical assistance. There is a need to provide focused technical assistance to build capacities in the formal financial sector in the region. However, Governments in the region have been hesitant to finance any sizeable technical assistance programmes through loan funds, even if their importance to project implementation is well understood. In this regard, and in line with the recommendation made regarding partnerships (as noted in paragraph ¿0 above), PN should enhance its efforts to attract grant-financed technical assistance from like-minded donors, complementing IFAD loan funds and improving implementation performance.

Every effort should be made to attract grant financed technical assistance and/or improve donor coordination to ensure that IFAD-financed loan funds are used for productive investments, while at the same time providing for the technical assistance required to enhance project implementation and build capacities at project level.
Follow-up action: IFAD, National Governments

Learning and innovation.  IFAD (as all other donors) has been involved in the CEN region for a relatively short time and PN needs to focus on feeding lessons learned from project implementation into the future project design. The specific conditions faced in the region also reflect similarities to some of the challenges faced in a number of other IFAD regions. PN needs to enhance and strengthen its knowledge sharing capacities both within the Division, in IFAD as a whole, and with other interested stakeholders.

Information and lessons learned from project implementation experience must be distilled and reapplied in new project design, both within the Division and in IFAD as a whole. A focused learning group bringing together all PN CEN region CPMs and representatives from concerned IFAD divisions (including PMD, OL, FC/L and OE) as well as the CI should be formed to carry out this task.
Follow-up action: PN, concerned divisions, CI

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1/ Approved IFAD financing.

2/The Core Learning Partnership was composed of: Mr Arben Jorgji, Executive Director of the Mountain Areas Financing Fund, Albania; Mr Noe Khozrevanidze, Programme Director of the Rural Development Programme for Mountainous and Highland Areas, Georgia; Mr Ion Russu, Project Director of the Rural Finance and Small Enterprise Development Project, Moldova; Mr Stefan Petrescu, Director General, Ministry of Public Finance, General Department for External Public Finances, Romania; Mr Henning Pedersen, Country Programme Manager for Albania, Near East and North Africa Division (PN), IFAD; Mr Abadalla Rahman, Country Programme Manager for Georgia, PN, IFAD; Mr Pietro Turilli, Country Programme Manager for Moldova and Romania, PN, IFAD; Ms Mylene Kherallah, Regional Economist, PN, IFAD; Mr Henri Dommel, Technical Adviser on Rural Finance, Technical Advisory Division, IFAD. Dr Mona Bishay, Deputy Director, Office of Evaluation, IFAD, was in charge of the evaluation.