Appraising Microfinance 47276 Institutions 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 BRIEF 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 and financial and social performance of an MFI. Institutions offers one approach to conducting Using the Appraisal Guide helps funders do the an appraisal. It is a comprehensive guide for following: organizing, implementing, and finalizing an MFI appraisal that can be adapted to the · Understand the vision, direction, health, and needs of a range of donors and investors. The stage of development of MFIs. Guide was updated in 2008 to reflect the latest · Assess MFIs' needs and capacity to absorb trends in the industry. It incorporates the latest funds and identify areas of potential support, microfinance knowledge and good practices to thus promoting more effective and efficient form a detailed roadmap that analysts can use use of donor and investor resources. to evaluate MFIs. The updated Guide includes · Establish baseline information to help with new sections on savings, poverty outreach, performance-based funding management. information systems, and risk management. Appraisal Guide for Microfinance Institutions Who should use promotes an industry standard for appraisals the Appraisal Guide? and is available free to funders, consultants, and others undertaking appraisals. Appraisal Guide for Microfinance Institutions is primarily for funders and the consultants they What is the purpose of hire to analyze MFIs. It calls for a lot of detailed the Appraisal Guide? analysis because it is designed to be used with relatively mature MFIs (for example, MFIs that While appraisals can take many forms and have more than 3,000 clients). It can be useful shapes, the Appraisal Guide serves as a one- to a wide range of funders, including bi- and stop-shop and an easy reference tool. It contains multilateral development agencies, foundations, detailed instructions, probing questions, and and nongovernmental organizations that are data input templates to support both qualitative considering funding or conducting ex post and quantitative analysis. Funders can use all or evaluations. The Guide can also inform or portions of the Appraisal Guide as needed. The complement other due diligence systems reports produced can be used to help donors investors are already using. Finally, it also can and investors assess the structure, strategy, be used by MFIs to conduct self-evaluations. December 2008 2 What does the 4. Social performance. Assesses how well the Appraisal Guide cover? MFI translates its social goals into practice, looking at systems, outreach, and potential The Appraisal Guide includes seven key areas for achieving impact. of analysis: 5. Loan portfolio quality. Reviews how the MFI measures, monitors, and manages its 1. Overview. Summarizes the MFI's vision loan portfolio, including its delinquency man- and mission, organizational strengths and agement and write-off policy and practice. weaknesses, and macroeconomic, political, 6. Financial performance and risk manage- and other external environmental factors. ment. Analyzes the MFI's financial 2. Institution. Describes the MFI's ownership performance, asset­liability management, and governance; management; organizational and risk and liquidity management. The structure; human resource management; Guide reviews systems of the institution as information and communications technology; well as ratio analysis. information quality, availability, and 7. Business planning. Evaluates the MFI's transparency; internal controls; internal and strategic and business planning process, external audits; regulation and supervision; financial projections, and funding strategy. ratings; and external relationships. 3. Products. Analyzes the MFI's financial To support this analysis, the Appraisal Guide products, such as voluntary savings and is comprised of three interrelated tools: the credit, and nonfinancial products. technical guide, resource manual, and Excel spreadsheet (Appraise.xls). Technical Guide Resource Manual · Instructions and probing · Detailed elaboration on the Technical Guide, with additional probing questions that focus on questions key analytical areas · Appendix containing resources and references, including, for example: · A checklist of information ­ Sample terms of reference to be gathered by ­ Management information system evaluation checklist experienced analysts ­ Social performance measures ­ Financial statement terms and analytical adjustments ­ Financial risk management analysis guidelines ­ Bibliography Excel Spreadsheet · Excel spreadsheet for each area of analysis · User-friendly format: language settings can be adjusted among English, French, and Spanish, while output tables can be easily converted into other document formats 3 How can donors and investors appraisal, using a subset of questions, may structure and conduct involve two to three days in the field and lighter appraisals? reporting. Whatever the approach or tool used, the Funders should consider a full or shortened following suggestions can help make the appraisal only if preliminary discussions indicate appraisal process efficient and effective for both that funding is reasonably likely, because funders and the MFIs they seek to support. gathering and analyzing information needed for an appraisal requires the MFI to collect substantial Ensure a knowledgeable analyst is involved. preparatory data. Funders can conduct an initial Appraisals typically cover a wide range of data screening to determine if the MFI's strategic on the MFI, from management issues to financial priorities are aligned with their own, and whether statement reconstruction. A highly skilled to move ahead with an appraisal. financial analyst with a broad understanding of the institutional development of MFIs and In some cases, if an MFI has a high-quality and financial performance is ideal for overseeing recent rating report, the information provided in and/or conducting the appraisal. The analyst it may even be sufficient for making a funding should have direct experience with microfinance decision. appraisals or ratings and should be fluent in the working language of the MFI. Depending on the Tailorappraisalapproachtoprojectrequirements. skill set of the analyst, the size and complexity of The terms of references for the appraisal the MFI, and the depth of the appraisal, a team should be adapted based on the appraisal's of specialists may be needed. purpose, the type of funding proposed, and the features of the MFI gleaned from a rating Match the length of appraisal to the desired or other informed source. The appraisal outputs and deliverables. The time required to template must be streamlined according to conduct an appraisal depends on the funder's data availability, resource constraints, and case- desired outputs and deliverables, as well as the specific information requirements to minimize amount of potential funding being considered. the burden on both MFIs and funders. A complete appraisal is appropriate only for significant funding decisions, and even then, the The Appraisal Guide's sample terms of reference topics for analysis should be carefully selected. can be useful to tailor appraisals to ensure that An analyst would need at least two or three only the most essential information is collected. weeks to complete a comprehensive appraisal-- Whenever possible, funders should consider including a site visit of five to seven days or partnering with other donors and investors more--depending on how much information considering investment in the same MFI to is readily available from the MFI. A shorter conduct a joint appraisal. December 2008 Maintain an open dialogue. Throughout the Resources appraisal, the funder should communicate clearly and often with the MFI to clarify Isern, Jennifer, Julie Abrams, and Matthew All CGAP publications expectations and processes. It is particularly Brown. 2008. Appraisal Guide for Microfinance are available on the important to involve the MFI's leadership Institutions. Technical Guide, Resource Manual, CGAP Web site at www.cgap.org. from the outset. Irrespective of the ultimate and Appraise.xls. Washington, D.C.: CGAP. investment decision, discussing appraisal CGAP results can be a valuable exercise for both 1818 H Street, NW MSN P3-300 funders and institutions, enhancing funder Washington, DC understanding and MFI effectiveness. Rigorous, 20433 USA objective feedback can be invaluable in helping Tel: 202-473-9594 to improve the health of the MFI. Fax: 202-522-3744 Email: cgap@worldbank.org © CGAP, 2008 AUTHORS Kelly Spann, with inputs from Alexia Latortue and Jasmina Glisovic-Mezieres