An Independent Evaluation of IFC's Experience with Financial Intermediaries in Frontier Countries
 |  | This study evaluates the effectiveness of IFC's strategic priority of private sector development in frontier countries (high-risk and/or low-income) by supporting micro, small, and medium enterprises (MSMEs) during fiscal years (FY)1994–2006.
IFC has channeled its support to MSME's by:
i) indirect financing through financial intermediaries, and ii) by indirect institution-building support via specialized regional small and medium enterprise (SME) development facilities.
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| This evaluation analyzes IFC's development results and provides recommendations on how IFC's performance can be improved in this area going forward. |
Main Findings
To answer the evaluative questions set forth this study: (i) identifies IFC strategies to support MSMEs in countries designated as frontier when the projects were approved during FY1994–2006; (ii) identifies and describes all operationally mature microfinance-intermediary (MFI) projects that were intended to support microenterprises in frontier countries (21 in the study period); (iii) identifies and describes all operationally mature small and medium enterprise–oriented financial intermediary (SME-FI) projects (72 in the study period); (iv) examines the development outcomes of the projects in the two evaluated populations, including their environmental, health, and safety (EHS) performance and other operating results during 1998–2005; (v) identifies the project success drivers, the main findings or lessons learned, and the valued-added role of IFC; and (vi) draws findings and recommends actions for IFC related to its strategies to support MSMEs.
The main findings of this review are:
- IFC’s strategy of providing indirect financial support to MSMEs through specialized financial intermediaries has been relevant and effective in terms of both development outcomes and IFC investment returns. IFC Advisory Services and equity investments (and other development institutions) contributed to the strategy’s success;
- In the case of financial intermediaries that specialize in lending to micro-enterprises (MFIs), an important success driver is a specific and supportive regulatory framework that, among other things, allows deposit-taking, establishment of branches, and reliance on competition to set reasonable interest charges;
- MFIs can transition out of donor dependency and become profitable and sustainable if they:
- Develop a large savings deposit base as a source of local currency funds for lending; and
- Expand the scale and scope of their operations to serve both micro-and small enterprises, thereby improving operating efficiency and outreach;
- The development results of MFI projects can be further enhanced if MFIs also serve the large need for savings and other banking services, such as remittances.
Recommendations
Based on the study findings, IEG recommends that IFC:
- Encourage other development partners (with strong government engagement) to promote the development of a specific and supportive prudential regulatory framework for MFIs that allows deposit-taking and the establishment of branches, and to foster competition to set reasonable interest rates for borrowers. This will facilitate the transition of MFIs out of donor dependency;
- Encourage selected MSME-FIs who have achieved good risk management practices to diversify their product offerings, and support these MSME-FIs with broader IFC Advisory Services including the development of technique and systems to:
- mobilize savings;
- provide other banking services to low-income households and businesses; and
- manage liquid assets;
- Place a higher priority on supervising and ensuring SME-FI compliance with IFC’s Environmental, Health, and Safety requirements.
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