J.10_-_LIM_Evaluation_Report_-__Final_20140305_V15.pdf

March 4, 2014

This publication was produced at the request of the United States Agency for International Development. It was produced by Social Impact Inc. under the PMPL program, headed by Harvey Herr, Chief of Party. Social Impact’s evaluation team contributors: Kamil Wanna, Tamara Nassereddine, Joanna Khater, Najwa Andraos, Joseph Kotun

LEBANON INVESTMENT IN

MICROFINANCE PROGRAM (LIM): MID-

TERM EVALUATION

LEBANON INVESTMENT IN

MICROFINANCE PROGRAM

(LIM): MID-TERM EVALUATION

March 4, 2014

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

This document is available in printed or online versions. Documents are also made available through the Development Experience Clearinghouse (www.dec.org). Additional information can be obtained from:

Social Impact, Inc. Corporate Office 2300 Clarendon Boulevard

Arlington, VA, 22201 Tel: (703) 465-1884 Fax: (703) 465-1888 info@socialimpact.com

USAID/Lebanon PMPL Project Social Impact, Inc.

Koukaz Building #13, Third Floor Ibrahim Medawar Street Postal Code 2058 7015 Badaro, Beirut, Lebanon

This document was submitted by Social Impact, Inc., with Management Systems International, to the United States Agency for International Development under USAID Contract No. RAN-I-00-09-00019, Task Order 07.

mailto:info@socialimpact.com

CONTENTS

Acronyms Executive Summary Evaluation Purpose & Evaluation Questions Project Background Evaluation Methods & Limitations Findings, Conclusions & Recommendations Annexes

Annex I: Evaluation Statement of Work Annex II: Evaluation Questions Mapped to Findings Annex III: Data Collection Instruments Annex IV: Sources of Information ANNEX V: Evaluation Response and Statement of Difference Annex VI: Disclosure of any Conflicts of Interest

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 1

ACRONYMS

ADR Association for the Development of Rural Capacities AEP Association Entraide Professionnelle AOR Agreement Officer’s Representative BDS Business Development Services CAS Central Administration of Statistics CDCS Country Development Cooperation Strategy CLD Lebanese Cooperative for Development DCA (USAID) Development Credit Authority DO Development Objective DHAIM Developing Hydroponics to Access International Markets DQA Data Quality Assessment EDF Entrepreneurial Development Foundation FAST Finance Alliance for Sustainable Trade FY Fiscal Year ICT Information Communication Technology IESC International Executive Service Corps IR Intermediate Result LBLI Lebanon Business Linkage Initiative LERC Lebanese Emigration Research Center LIVCD Lebanon Investment in Value Chain Development MED Microenterprise Development MFI Microfinance Institution MIX Microfinance Information eXchange MRR Microenterprise Results Reporting MSME Micro, Small and Medium Enterprise PAT Poverty Assessment Tool PMP Performance Monitoring Plan PMPL Performance Monitoring Program-Lebanon PPI Progress out of Poverty Index PPR Project Performance Results RFA Request for Applications RIG (USAID) Regional Inspector General SEEP Small Enterprise Education and Promotion SI Social Impact, Inc.

SOW Statement of Work U.S. United States USAID U.S. Agency for International Development VEGA Volunteers for Economic Growth Alliance

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 2

EXECUTIVE SUMMARY

EVALUATION PURPOSE AND EVALUATION QUESTIONS

The Volunteers for Economic Growth Alliance (VEGA) Lebanon Investment in Microfinance (LIM) Program is funded by the U.S. Agency for International Development (USAID) and implemented by the International Executive Service Corps (IESC). Since its inception up until March 2013, the LIM program has partnered with eight Microfinance Institutions (MFI), to maximize access of finance to micro enterprises and small businesses, operating in the Agribusiness, Tourism and Information and Communication (ICT) value chains.

The Agreement Officer’s Representative (AOR) for the LIM program requested a mid-term formative performance evaluation of the LIM program, to be implemented by Social Impact’s PMPL team in Lebanon. Subsequently, the Office of the Inspector General (OIG) conducted an audit of the LIM program during April and May that addressed many of the issues initially raised by the AOR. Due to the audit findings the LIM program is making mid-course corrections. This resulted in a re-framing of the evaluation so that post-LIM issues can be addressed. The AOR described the evaluation as an external technical review of the LIM program implemented by IESC aimed at determining what is needed from a follow-on post LIM program. A revised scope proposes looking beyond what LIM has achieved to the sustainability of the sector post-LIM, and to future Economic Growth programming.

The objectives of the evaluation are:

• Examine if LIM has targeted underserved categories of borrowers including new business start-ups and businesses owned by or employing women and youth.

• Examine if loans granted under LIM have had a development economic impact such as a rise in income or an increase in employment or both.

• Examine if LIM has built the institutional capacity of partner microfinance institutions (MFIs) in terms of human resources, management, business and financial sustainability, as well as capability and capacity to serve a larger number of communities.

• Examine capacity building of MFI to outsource loan origination.

• Identify success and/or lessons learned.

PROJECT BACKGROUND

In May 2009, USAID awarded International Executive Service Corps and Volunteers for Economic Growth Alliance (IESC/VEGA) the Lebanon Investment in Microfinance (LIM) Program, designated to assist Lebanese micro and small enterprises increase sales, create jobs, and advance economic growth through improved access to finance, and to strengthen microfinance institutes capacity for providing access to finance/microfinance services to Lebanese micro and small enterprises. The program assists micro and small enterprises by maximizing the availability of loans for borrowers in sectors and areas that have traditionally had difficulty accessing business finance. The LIM Program is funded by the United States Agency for International Development (USAID), through Leader with Associate Cooperative Agreement number: EEM-A-00-04-00002-00 to the Volunteers for Economic Growth Alliance (VEGA), Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 3 and is implemented through Associate Award number: 268-A-00-09-0003 by the International Executive Service Corps (IESC).

EVALUATION QUESTIONS, DESIGN, METHODS AND LIMITATIONS

See Annex II for a chart that maps the evaluation questions to the findings.

The Social Impact evaluation team designed the midterm formative evaluation to address the following evaluation questions:

I. How are beneficiaries in the three focal sectors (agribusiness, tourism, and information communication technology) selected by the MFI and does this respond to the objective of the program?

II. How can the MFIs be assisted to expand their outreach to the targeted beneficiaries and very poor clients?

III. Does LIM target new-business startups or businesses owned by women or youth? What are the selection criteria that qualify a business owner for a loan?

IV. Do the loans granted under LIM lead to a rise in income? How would LIM assess whether sales and income increased?

V. What evidence is there that new employment was created and/or sustained?

VI. What activities has LIM implemented to build the institutional capacity of partner microfinance institutions? What is the evidence that capacity was improved and what business development services were crucial to growing micro, small and medium enterprises?

The Social Impact team’s evaluation design incorporated a variety of targeted methods to address the evaluation questions by eliciting rich information and triangulating emerging trends and themes. Methods included 1) document review; 2) interviews with LIM program staff and key informants in business and government; 3) semi-structured interviews with participating MFI directors and other staff; 4) semi-structured interviews with an array of purposively sampled MFI clients using criteria that included loan type, loan size, gender, geographic location, and the MFI in which they participated; and 5) guided focus group discussions.

The evaluation was carried out in Lebanon during two phases: December 6-20 and January 7-21. The bulk of the interviews and focus groups proceeded as planned. While security conditions, particularly during the second phase of the evaluation, impeded a few aspects of the planned work, the evaluation team concluded that the diversity and coverage of key informants were both sufficient and robust enough to allow for compiling reliable findings and formulating recommendations.

Limitations were caused by political unrest on two days during the evaluation timeframe. Several of the scheduled beneficiary interviews, one scheduled focus group and an MFI site visit had to be canceled due to security concerns for both the evaluation team and the respondents.

SUMMARY FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

Finding 1: Most (six out of eight) of LIM’s partner MFIs have achieved operational sustainability.

• Conclusion 1: The regulatory environment in Lebanon presents unique challenges and opportunities for sustainability for LIM’s partners.

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 4

• Recommendation I(a): USAID could reduce LIM’s overall sub-grant funding provided for capital provisioning, but target it specifically toward more challenging beneficiary categories that remain under-represented in LIM’s portfolio.

• Recommendation I(b): Underwrite higher risk categories of loans through USAID’s Development Credit Authority (DCA) program., or similar type of credit guarantee scheme.

Finding 2: LIM’s partners highly value the institutional level training that LIM has provided for their staff.

• Conclusion 2: MFIs will need to have on-going access to training and support.

• Recommendation 2(a): It would be beneficial for the MFIs to develop their own training curricula and training capacity tailored for their policies and operations.

• Recommendation 2(b): LIM should evolve its approach to core competency training for MFIs toward fee-for-service basis.

Finding 3: Many of LIM’s beneficiaries interviewed expressed need for business development services

• Conclusion 3: Many beneficiaries would benefit from access to BDS training.

• Recommendation 3(a): LIM should address clients’ needs for BDS and provide training and/or

Training of Trainers for MFI clients.

• Recommendation 3(b): LIM could develop a pilot initiative in micro-franchising for youth enterprises.1

Finding 4: Although difficult to quantify, LIM’s beneficiaries report increased incomes.

Conclusion 4. Improved understanding of LIM’s effects on beneficiaries’ incomes is needed.

Recommendation 4: LIM should carefully monitor the quality of income data collected.

Finding 5: New job creation as a result of LIM’s investments is largely limited to loans for start-up enterprises.

• Conclusion 5: Providing loans for start-up enterprises is the most reliable way for MFIs to support job creation for target populations.

• Recommendation 5: Establish specific targets for loans to start-up businesses, coupled with incentives to MFIs to move down market.

Finding 6: LIM’s current indicators (income generation and job creation) are inadequate to identify and track poor and very poor beneficiaries. The lack of appropriate tools to measure poverty reduces LIM’s efficacy to reach down market.

• Conclusion 6: MFIs in Lebanon need better means of identifying and tracking whether they are reaching poor households.

• Recommendation 6: Develop a Poverty Assessment Tool or similar tool for Lebanon.

Finding 7: Relatively low risk loans to MSMEs comprise the largest portion of the portfolio while poorer, higher risk beneficiaries are under-represented in the program portfolio.

• Conclusion 7: LIM’s targeted sectors and beneficiaries are very broadly defined by USAID, and no priorities have been set among categories.

• Recommendation 7(a): Structure future MFI sub-agreements to ensure the inclusion of closely defined, higher risk beneficiaries especially for MFIs that have achieved sustainability.

1 There are many successful examples of micro-franchising on USAID’s microlinks.com portal site, CGAP’s Microfinance Gateway and several NGOs describe their experience with micro-franchising.

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 5

• Recommendation 7(b): Within RFAs, provide a sub-list of higher risk categories of potential borrowers to be specifically targeted by a portion of sub-grant funds or underwritten through DCA-funded portfolio guarantees.

Finding 8: On the whole, women benefit from LIM’s program.

• Conclusion 8: LIM’s MFIs have in some cases attempted to address their gender gap in outreach to women.

• Recommendation 8: Conduct a gender analysis for access to finance to better understand ways to address constraints to women’s participation as well as the non-financial impact on women beneficiaries’ empowerment.

Finding 9: There is an unmet demand for savings among many of LIM’s beneficiaries.

• Conclusion 9: Lack of access to savings deprives poor clients of an essential tool for accumulation of assets and building wealth.

• Recommendation 9: LIM should assume a leadership role to promote the value of savings to

LIM’s partner MFIs and promote development of a savings culture among LIM’s beneficiaries taking into consideration current Central Bank restrictions.

Finding 10: Lebanon does not currently have an effective enabling environment for the microfinance sector.

• Conclusion 10: Regulations governing the sector lag behind the development and growth of MFIs.

• Recommendation 10: LIM or a post-LIM project should continue to play a strong leadership role in the continued development of the Microfinance Association including technical advising and advocating best practices that foster an effective enabling environment.

OVERALL CONCLUSIONS

LIM has enhanced the microfinance sector in Lebanon. Perhaps LIM’s most significant achievement, the successful development of a professional Microfinance Association presents a significant opportunity for Lebanon’s microfinance sector to mature and grow. LIM has catalyzed growth in the key economic sectors of small and medium enterprises, especially in providing capital for MFIs to expand into rural and other underserved communities. LIM has been instrumental in developing technical capacity through professional training and mentorship with the MFIs.

While these are important achievements, the evaluation also includes some findings that are cause for significant concern. The most important of these is LIM’s limited success in reaching poor and higher risk beneficiaries. Despite the conclusions that discuss LIM’s problematic scope of work and USAID’s lack of specific performance targets for these groups, in the end it is LIM’s responsibility to substantively reach all the intended categories of beneficiaries, including women, youth and start-up businesses. These categories of higher risk beneficiaries are severely under-represented in LIM’s overall loan portfolio.

Two primary challenges that LIM now faces are its potentially divergent focus and its reliance on indicators that do not sufficiently facilitate helping MFIs to reach the higher risk and poorer categories of beneficiaries who remain under-represented in the MFI portfolios. While LIM’s statement of work does reference these under-represented potential beneficiaries, some of LIM’s key indicators for reporting refer to supporting economic growth for key sectors and categories of beneficiaries who, while (mostly) marginally poor, are economically viable and are already being served by the MFIs without LIM’s sub-grant funding. If USAID’s interest also includes working down-market, with poor and vulnerable beneficiaries, particularly in poor rural communities that are facing increased pressure from the influx of refugees from the Syrian conflict, then USAID could consider enabling/authorizing LIM to make course

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 6 changes and restate program objectives and targets to accommodate more traditional microfinance clients, i.e., the poor, represented by women, youth, and the rural unemployed whose options for financial stability where there are few jobs are limited to starting a new business.

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 7

EVALUATION PURPOSE & EVALUATION QUESTIONS

EVALUATION PURPOSE

The Volunteers for Economic Growth Alliance (VEGA) Lebanon Investment in Microfinance (LIM) Program is funded by the U.S. Agency for International Development (USAID) and implemented by the International Executive Service Corps (IESC). Since its inception up until March 2013, the LIM program has partnered with eight Microfinance Institutions (MFI) to maximize access of finance to micro enterprises and small businesses operating in the Agribusiness, Tourism and Information and Communication (ICT) value chains.

The Agreement Officer’s Representative (AOR) for the LIM Program requested a mid-term formative performance evaluation of the LIM Program early in 2013. Subsequently, the Office of the Inspector General (OIG) conducted an audit of the LIM Program during April and May that addressed many of the issues initially raised by the AOR. Due to the audit findings the LIM Program began making mid-course corrections. This resulted in a re-framing of the evaluation so that post-LIM issues can be addressed.

The AOR described the evaluation as an external technical review of the LIM Program implemented by IESC aimed at determining what is needed from a follow-on, post LIM Program.

The objectives of the evaluation are to

• Examine if LIM has targeted underserved categories of borrowers including new business start-ups and businesses owned by or employing women and youth.

• Examine if loans granted under LIM have had a development economic impact such as a rise in income or an increase in employment or both.

• Examine if LIM has built the institutional capacity of partner microfinance institutions (MFIs) in terms of human resources, management, business and financial sustainability, as well as capability and capacity to serve a larger number of communities.

• Examine MFI sustainability assuming grants to MFI are not continued.

• Identify success and/or lessons learned.

• Examine if LIM assisted the Partners in increasing number of SME loans.

• Identify business development service needs of identified by the beneficiaries, and by the

MFIs.

• Examine potential advantages of an association of microfinance institutions.

EVALUATION QUESTIONS

See Annex II for a chart that maps the evaluation questions to the findings.

The evaluation of the LIM Program focused on the following evaluation questions:

• How are “agribusiness,” “tourism” and “Information Communication Technology (ICT)” beneficiaries selected by the MFI? Does this respond to the objective of the program?

• How can the MFIs be assisted to expand their outreach to the targeted beneficiaries and the very poor clients?

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 8

• Does LIM target “new-business startups”, “businesses owned by women,” and/or “businesses owned by youth”? What are the selection criteria that qualify a business owner for a loan (eligibility criteria)?

• Do the loans granted under LIM lead to a rise in income? How would LIM assess whether sales and income of micro-credit loan recipient have increased or not?

• What evidence is there that new employment was created? What evidence is there that employment was sustained?

• What are the activities that LIM had implemented or is implementing in order to build the institutional capacity of partner microfinance institution? And what evidence is there that capacity was improved? What business development services were crucial to growing micro, small and medium enterprises (MSMEs)?

The evaluation team was asked to provide recommendations for the following:

• Better targeting of MFI loan beneficiaries.

• Sustainable MFI in a post-grant, loan guarantee environment.

• How can LIM better target the poorest segments of Lebanese society to insure alignment to the CDCS DO.

• How can LIM become more proactive towards female empowerment (not loans given on behalf of male relative).

• Other loan products needed by the market, not currently addressed.

• Business development services to be provided to loan beneficiaries.

• Establishing an Association of MFIs.

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 9

PROJECT BACKGROUND

PROJECT CONTEXT

In May 2009, USAID awarded International Executive Service Corps and Volunteers for Economic Growth Alliance (IESC/VEGA) the Lebanon Investment in Microfinance (LIM) Program, designed to 1) assist Lebanese micro and small enterprises increase sales, create jobs, and advance economic growth through improved access to finance and 2) to strengthen microfinance institutes’ capacity for providing access to finance/microfinance services to Lebanese micro and small enterprises. The program assists micro and small enterprises by maximizing the availability of loans for borrowers in sectors and areas that have traditionally had difficulty accessing business finance. The program is designed to reach and answer the needs of micro and small enterprises operating in the target sectors that are located across rural and peri-urban areas in Lebanon.

PROJECT IDENTIFICATION

The LIM Program is funded by the United States Agency for International Development (USAID), through Leader with Associate Cooperative Agreement number: EEM-A-00-04-00002-00 to the Volunteers for Economic Growth Alliance (VEGA), and is implemented through Associate Award number: 268-A-00-09-0003 by the International Executive Service Corps (IESC).

SCOPE OF THE PROJECT

The Lebanon Investment in Microfinance Program start date was May 8, 2009, and its original end date was November 7, 2010. On September 15, 2010, the program received a funded extension through April 30, 2015 and was granted additional funding for a total program value of $12,182,636.

The program was designed to support selected subgrantee microfinance institutions and their borrowers to provide targeted loans with these grant funds beginning in the first quarter following program award. The IESC team focused in the first phase upon five key microfinance institutions that conduct microlending on a large scale, but granted program funds to only three MFIs. At the time of this mid-term evaluation, eight organizations in total had received a sub-grant. These were Association Entraide Professionnelle (AEP), Association for the Development of Rural Capacities (ADR), Al Majmoua, Ameen, Makhzoumi Foundation, Lebanese Cooperative for Development (CLD), Emkan, and the Entrepreneurial Development Foundation (EDF).

The subgrantees issue loans to individuals, microenterprise, farmer, cooperative, or cooperative member. IESC should closely monitor the increase in incomes, and creation and maintenance of jobs that resulted from the targeted lending of the grant funds to borrowers, disaggregated by males and females, within the ICT, tourism and agribusiness value chains. The program provides value added technical assistance to the microfinance institution subgrantees. Key topics covered included 1) microfinance industry best practices and 2) training of MFI loan officers in the improvement and development of ICT, tourism and agribusiness business development services for their borrowers and potential borrowers.

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 10

Originally, the IESC team and its MFI subgrantees worked with the USAID ICT, tourism and agribusiness value chain program, the Lebanon Business Linkage Initiative (LBLI), and other donor-funded programs working in these value chains in order to identify and reach potential borrowers, leverage technical assistance and training, and maximize program results. The DHAIM and LIVCD projects also promote access to finance aimed at enhancing value chain development; LIM works to coordinate its financial activities with these two projects.

CONTRACT AND CONTRACT MODIFICATION

Baseline Cooperative Agreement The baseline contract (Total federal share amount $1,609,755 over 18 months starting May 8, 2009), makes reference to the needs of the microfinance institutions in Lebanon and the context of three sectors (tourism, ICT and agribusiness) to which microloans should be delivered.

The program consisted of the three main components:

- Grants Management (MFIs)

- Microfinance Subgrantee Lending

- Technical Assistance and Training

In this first phase of the program, IESC received five applications from leading MFIs in response to the (Request for Applications (RFA) issued by IESC. After the evaluation of the five applications, three leading MFI organizations were chosen by the LIM Grant Committee to receive program funding and were allocated a total grant funding of $1,050,000: Al Majmoua ($400,000), Ameen ($400,000), and ADR ($250,000).

Contract Modification The modification to the agreement (total federal share amount to $12,182,636 over 6 years starting May 2009), made reference to the results achieved since the rapid start-up of the program in May 2009 and aimed at magnifying the results achieved by substantially deepening and broadening the impact of the program. This modification broadened LIM’s reach by incentivizing access to finance for businesses in three sectors (agribusiness, tourism, ICT), as well as for underserved categories of borrowers including:

1) micro and small businesses across all rural, remote and peri urban areas of Lebanon; 2) new business start-ups; and 3) businesses owned by or employing women and youth. This modification and extension was expected to enable LIM to have a much deeper impact by increasing the value of funds available for small and micro-enterprises in underserved segments. The project intended to do this in six ways:

1. Provide qualified MFIs a new infusion of capital for targeted categories of borrowers and expand the benefits of the program’s access to finance to a larger number of micro/small businesses.

2. Increase the number of partner MFIs that the program works with, thus covering areas and communities not reached in the current program.

3. Require funds already dispersed under the LIM Program to be recycled as payments are received and put back into loan products oriented toward the same loan categories. Recycled disbursements were meant to be subject to the same monitoring and evaluation process and supervision by the LIM team.

4. Open up opportunities for a larger number of small and medium business investments by increasing the maximum loan value an MFI may disburse under the program.

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 11

5. Develop tailored loan products for targeted sectors and categories of borrowers - especially to fit the needs of agribusinesses and tourism micro and small businesses.

6. Use USAID resources to leverage much larger sources of debt finance and direct those loans toward priority areas.

INSTITUTIONAL CONTEXT

The LIM Program was designed to work closely with USAID/Lebanon and local partners on program activities, specifically in the selection of new subgrantees for the program and to focus on providing linkages and coordination with the Central Bank of Lebanon. The VEGA implementing organization and the IESC work closely with the Financial Services Volunteer Corps (FSVC) and with local organizations in Lebanon including the local municipalities, the chambers of commerce, and other local business support organizations.

LIM has been reaching out and is planning to coordinate activities and/or projects with a number of international organizations that can provide assistance in helping the MFIs develop processes to meet international reporting standards. These institutions are the Lebanese Emigration Research Center (LERC), Sanabel, the Small Enterprise Education and Promotion (SEEP) Network, Microfinance Information eXchange (MIX), Kiva, and the Finance Alliance for Sustainable Trade (FAST).

PROJECT INTENDED RESULTS

As stated in the Program Goals and Objectives section (p.5) of Mod 2 of VEGA’s grant, within the $12.182.636 budget over six years the LIM project is expected to

• Conduct financial sector assessment

• Complete an infusion of capital for qualified MFIs

• Provide technical assistance to MFIs to develop new products and provide larger loans and to banks to develop new products and reach the missing middle (loan amounts ranging from $7000 - $25000) through smaller bank loans

• Select a guarantee scheme and develop the implementation plan and implement the selected loan guarantee scheme

• Establish linkage with other programs

• Provide technical assistance and build the capacity of the lender through

- Attendance at the Boulder microfinance training program

- Training and capacity building in microfinance lending and operations

- Training and capacity building in agricultural lending risk calculation

- Capacity building for banks to outsource the loan origination part of the business to organizations or entities (like farmer cooperatives) that are closer to the end user

- Fostering partnerships between banks and MFIs to share the risks and reduce costs

- Capacity building of Lebanese business development service providers and lenders on business development service offerings

- Lender capacity building regarding their outreach efforts

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 12

RESULTS FRAMEWORK/PMP

The following is the LIM Program results framework submitted in the Performance Management Plan (PMP), (p. 14) submitted on June 25 2013

DO2: Enhanced economic opportunity for the poorest segments of Lebanese society, particularly in areas outside metro Beirut

Custom Indicator: Percentage increase of direct beneficiaries that report increases in average daily income as a result of USG assisted sources

PPR2: Increased number of clients at USG assisted microfinance institutions

• F Indicator 4.3.2-7: Number of financial institutions receiving USG assistance in extending services to micro & small businesses.

• F Indicator 4.7.1-12: Total number of clients benefiting from financial services provided through USG-assisted financial intermediaries, including non-financial institutions or actors.

o Tracks number of clients that access MFI Loans o Tracks number of clients that access MFI SME

Loans above $5000 o Tracks number of repeated clients per program duration

PPR 1: Increased number of financial sector professionals trained on international standards with USG assistance.

• F Indicator 4.7.1-16: Number of days of USG funded technical training provided to management and/or staff of financial intermediaries.

• Custom Indicator: Tracks the number of Trainees per reporting year.

• Custom indicator: Number of management and/or staff of financial intermediaries showing increase in knowledge from before to after the USG-funded training experience.

• Custom indicator: Number of financial intermediaries showing improved performance as a result of USG-funded training to their managers and/or staff

Activity:

1. Provide new Infusion of Capital to MFIs

2. Increase number of MFIs receiving USG assistance

3. Increase the number of clients at USG assisted

Firms

4. Develop New MFI loans for selected sectors

5. Develop new MFI Loan products (above $5000) for

SMEs

6. Increase access to finance for targeted MSMEs through improved MFI/Bank Linkages

Activity:

1. Provide Technical Assistance / Capacity Building to Selected Lending Providers

• Custom Indicator: based on F indicator 4.5-2:

Number of jobs attributed to FTF implementation o Custom Indicator: Tracks Number of new job positions in USG assisted enterprises o Number of impacted jobs in USG assisted enterprisesssisted enterprises

1. F Indicator 4.5.2-29: Tracks value of agricultural and rural loans (by gender and youth)

IR 2.3 Increase Access to Finance for Micro, Small &

Medium Enterprises

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 13

DEVELOPMENT HYPOTHESIS

No development hypothesis was stated in the project work plan or performance management plan.

However, in Lebanon, and particularly in rural areas, micro and small enterprises in sectors such as agribusiness, tourism and ICT have traditionally experienced difficulties accessing business finance, which hinders their economic growth, the creation of jobs, and the increase of sales. Through its activities, LIM Program works to provide organizational and human resources capacity building, infuse capital and sustain/grow the number of partner MFIs, increase loan value to attract SME borrowers, and assist in developing SME loans, link to international resources and to other local USAID programs (such as DHAIM and LIVCD) and develop assessment/awareness regarding the establishment of a Microfinance Association. Therefore, a proxy hypothesis is that as a result of the LIM Program, more loans will be available for borrowers in sectors and areas of agribusiness, tourism and ICT and thus micro and small enterprises will have easier access to business finance, resulting in higher revenues generated and more jobs created.

CRITICAL ASSUMPTIONS

• The demand for MFIs loans remains high where no other implemented program by USAID or other donor would be offering grants to beneficiaries.

• Flexibility to adjust course when needed to adapt to beneficiaries needs as observed on the ground.

• No terrorism threats specifically directed at USAID or U.S. government-funded programs or organizations and freedom of movement for program staff and partners across Lebanese territory.

• Sufficient level of political stability to enable program operations and no eruption of major, wide-scale conflict during the life of LIM Program.

AUDIT FINDINGS

The Regional Inspector General/Cairo conducted an audit to determine whether LIM Program was achieving its goal to increase sales, create jobs, and advance economic growth. The audit found that the program contributed to positive outcomes as it has generally improved access to credit by providing loans to more than 6300 borrowers and has contributed to the creation of some jobs.

Some problems were also identified by the audit. The main problems identified were that the program indicators did not measure progress toward goals, the Mission did not obtain sufficient sustainability commitment from two of the eight MFIs, and the Mission did not measure training results.

The recommendation that came out of this audit pointed to the need to 1) collect and document data on the number of jobs created separately from data on number of jobs maintained; 2) develop a tool to measure income proxies of borrowers; and 3) establish a definition of a “job created” for microfinance reporting purposes. To address these problems, the auditors recommended that the LIM Program develop monitoring procedures to track microfinance partner progress toward sustainability. Finally, the auditors recommended amending LIM Program monitoring and evaluation plan to include an indicator measuring training results and that the LIM Program collect and evaluate training outcome data already available from the implementing partner.

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 14

EVALUATION METHODS & LIMITATIONS

The Social Impact team’s evaluation design incorporated a variety of targeted methods to address the evaluation questions by eliciting rich information and triangulating emerging trends and themes. Methods included

1) Review of key documents. These are listed in Annex IV: Sources of Information

2) Interviews with LIM program staff and the Executive Director and Deputy Governor of Lebanon’s Central Bank. Four evaluation team members collaborated in these interviews and compared notes.

Interviews were conducted in English.

3) Semi-structured interviews with participating MFI directors and other staff including Loan Officers, Branch Managers and/or area Supervisors. At least two, and usually more of Social Impact’s evaluators collaborated in these interviews. Nearly all interviews were conducted in English, with several loan officers interviewed in a mix of English and Arabic, with one evaluator providing interpretation where necessary. Interviews were recorded, with permission and recordings were later used to improve quality of notes. Where relevant, interview findings were compared with corresponding documents detailing MFI performance, financials etc.

4) 15 individual, semi-structured interviews with an array of purposively sampled MFI clients using criteria that included loan type, loan size, gender, geographic location, and the MFI in which they participated; To avoid the risk of MFI’s “cherry picking” their most successful clients for interviews, the evaluation team selected a purposeful sampling of individual clients to be interviewed in order to capture a representative cross section of LIM beneficiaries using criteria including of loan type and size, gender, geographic location, and lender MFI. Details of interview subjects can be found in Annex IV: Sources of Information. Most individual client interviews were conducted in Arabic, with at least two evaluators;

one serving as interpreter where necessary.

5) Two guided focus group discussions; one focused on 10 women beneficiaries identified as low income, the other was a group of 15 (mostly) male agricultural producers. Discussions were facilitated in Arabic; three evaluators participated, one guiding discussion, one providing interpretation, and one prompting questions and taking notes. Focus group discussions were recorded and notes were compared, corrected and details added later from the recordings.

The evaluation was carried out in Lebanon during two phases: December 6-20, 2013 and January 7-21, 2014. The bulk of the interviews and focus groups proceeded as planned. While security conditions, particularly during the second phase of the evaluation, impeded a few aspects of the planned work, the evaluation team concluded that the diversity and coverage of key informants was both sufficient and robust enough to allow for compiling findings and formulating recommendations.

Limitations were caused by political unrest on two days during the evaluation timeframe. Several of the scheduled beneficiary interviews, one scheduled focus group, and an MFI site visit in the South part of Lebanon had to be canceled due to security concerns for both the evaluation team and the respondents.

FINDINGS, CONCLUSIONS & RECOMMENDATIONS

This evaluation resulted in ten central findings with corresponding conclusions and recommendations.

See Annex 2

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 15

Finding 1: Most (six out of eight) of LIM’s partner MFIs have achieved operational sustainability.

Vetted financial data is available for five of LIM’s eight partners as reported by the Mix Market,2 a widely recognized reporting and rating agency for MFIs. The remaining three partners provide LIM with financial statements. The MFI partners all show strong financial performance with respect to portfolio quality (as measured by 30 day Portfolio at Risk (PAR 30) profitability.

Six partners have achieved operational sustainability. 3 The remaining two have signed commitment statements with LIM and discussed preparing a business plan with milestone targets for growth that will enable operational sustainability within an acceptable window. One of the latter two MFIs is a social services NGO that offers a diversity of non-financial services including business training and has only recently begun lending operations with a very small current portfolio. The other MFI reported challenges that include very modest growth projections because of capital constraints, a Board of Directors reluctant to raise interest rates to sustainable levels, and lack of capacity in financial management and projections.

The Central Bank in Lebanon classifies financial institutions, including MFIs, in three broad categories; as commercial banks, non-bank financial institutions, or as NGOs. Only banks are allowed to collect deposits. LIM’s partners, all classified by Lebanon’s Central Bank as either non-bank institutions or NGOs, are prohibited from collect and mobilize deposits, so this inexpensive source of capital for on-lending is not available to MFIs in Lebanon.

An additional sustainability constraint raised by several of LIM’s partners with strong poverty alleviation-related missions is the difficult internal and external politics involved in getting approval by their Boards of Directors to set interest rates to sustainable levels.

LIM’s partners that are bank subsidiaries have faced challenges in accurately measuring sustainability due to the fact that they have only recently begun to track their microfinance loans separately from the rest of the bank’s larger portfolio. Because the accounting for operational costs is not strictly delineated (e.g., for the subsidiary as a cost center) it is difficult to calculate the overall sustainability of the microfinance operations. This is particularly an issue when sustainability of the subsidiary is not a key concern of the bank partner.

The larger MFIs with bank partnerships do not report being constrained by lack of capital, given their current growth projections. However, several of the smaller MFIs do face this constraint, and these MFIs are of particular interest to LIM because of their focus on (or at least willingness to try to serve) higher risk categories of borrowers such as new start-ups and agricultural producers.

Conclusion 1: The regulatory environment in Lebanon presents unique challenges and opportunities for sustainability for LIM’s partners.

A critical challenge faced by the MFIs is their inability to utilize deposits for on-lending capital. Deposits are a critical source of inexpensive capital available to MFIs in other countries, and growth of an MFI’s

2 See http://www.mixmarket.org/ for report details on five of LIM’s eight partner MFIs.

3 For clarity, Operational Sustainability is defined here by the following ratio: Operational Sustainability = Operating revenue ÷ (Financial Expenses + Operating Costs + Loan Loss Provision).

http://www.mixmarket.org/

Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 16 savings portfolio is a key strategy used for a financially sustainable trajectory. Revenues generated by interest income for LIM’s partners do not allow for more than very modest growth projections; interest rates charged to their borrowers would have to be much higher in order to be able to generate growth capital in addition to covering operational costs. As a result, LIM’s partners’ potential for growth is limited to the availability of donor funds and/or more expensive alternative sources of capital to grow their loan portfolios and increase their outreach.

While the inability to mobilize deposits is an important limitation, Lebanon’s banking sector has a large proportion of excess liquidity: more capital than investment opportunities. As a result, the Central Bank allows the commercial banks to reduce their excess reserves by providing a regulatory mechanism that allows them to provide inexpensive institutional loans through a Loan Reserve Fund to the MFIs for loan capital. Most of LIM’s partners have taken advantage of this opportunity and have established relationships or formal partnerships with one or more of the commercial banks that provide them with capital. Interest rates for such loans vary between 2.5% and 4.5%. As a result, access to capital is not a key constraint for most of LIM’s partners who have only modest growth aspirations.

However, there are exceptions. The smaller MFIs have not established bank partnerships, and they report limited capital as a constraint to growth. In addition, one MFI that was accustomed to receiving inexpensive institutional loans discussed a recent experience where their bank partner’s available loan reserve funds had been exhausted. While the Central Bank’s Executive Director expressed confidence in the availability of Loan Reserve funds as a reliable source of capital for the foreseeable future, the potential loss or scaling back of available reserve funds (which, as noted above, has already been experienced) could present a critical threat to Lebanon’s MFI sector.

The smaller MFIs, the ones that face the most significant limitations to access to capital, are among those with the best potential for reaching higher risk categories of borrowers and are among the most important to achieving USAID’s objectives through LIM. Their access to adequate and appropriately priced capital is an important factor in sustainability and ability to serve USAID’s priority target borrowers.

Recommendation I(a): USAID could reduce LIM’s overall sub-grant funding provided for capital provisioning, but target it specifically toward more challenging beneficiary categories that remain under-represented in LIM’s portfolio.

Some of the smaller MFIs, the ones that both have the best potential to serve the higher risk categories of borrowers of interest to USAID (such as new start-ups and agricultural producers) face the most significant challenges in access to capital. These MFIs represent the best opportunities for innovation;

they view LIM’s more challenging categories of beneficiaries as potential market niches. While remaining sub-grant funds in the current LIM performance period (ending in April 2015) are already earmarked, any future sub-grant funds in a LIM follow-on project should be very carefully targeted toward reaching underserved categories of beneficiaries with RFAs designed to promote innovation and increased risk.

Recommendation I(b): Underwrite higher risk categories of loans through USAID’s Development Credit Authority (DCA) program, or similar loan guarantee programs.

As an alternative or in addition to sub-grant funding, LIM could also mitigate the risk that MFIs face with more challenging categories of borrowers by providing a loan guarantee to partially underwrite the higher risk portions of their portfolio. USAID could utilize loan guarantees provided through the Development Credit Authority (DCA) for this purpose through risk-sharing agreements with LIM and/or their MFI partners to encourage lending for new business start-ups, for higher risk borrowers, Lebanon Investment in Microfinance Program (LIM): Mid-term Evaluation, March 2014 17 and for agricultural lending.4 The DCA has been used, for example in Indonesia, to enter into a loan portfolio guarantee agreement with a large commercial bank to address MSE demand for microfinance.5 Similarly, in Kenya, DCA guarantees to the participating bank “was also to expand financial services to underserved clientele especially women, which it did under the Grace loan scheme.6” Thus, the concept is viable and proven. In Lebanon loan guarantees might be considered to local commercial banks that have associated MFI operations to target specific loan portfolios to the specified underserved down-market clientele.

Finding 2: LIM’s partners highly value the institutional level training that LIM has provided for their staff.

In addition to providing specialized Loan Officer training on a regular basis for the MFIs, LIM has offered a variety of training, conference, and mentoring activities since program inception (Annex VI provides a list of these). According to evidence from interviews with the MFIs, LIM’s training for their Directors, Managers and Loan Officers has been very effective in building institutional and professional capacity. In addition, LIM solicits and collects post-training feedback from participants; these reports provide further evidence of LIM’s value and success with its training activities. During interviews, the MFIs credited LIM’s training with improved performance in client outreach and customer relations, reduced delinquency, better loan application assessments, and product development, among other MFI outcomes.

IESC’s initial strategy was to provide LIM with volunteer trainers from its network of business executives and experts in response to training needs in specific subject areas. Unfortunately, the deteriorating security environment in Lebanon has caused IESC to put its volunteer program on temporary hiatus until the situation improves. However, LIM has responded by recruiting Lebanon-based experts, who have provided excellent quality training, in some cases in Arabic, with the advantage of local experience and knowledge.

While the MFIs reported satisfaction with LIM’s Loan Officer training, this training has been on a one-size-fits-all approach; Loan Officers from multiple MFIs have been trained together, despite their institutions’ differences in lending policies and procedures. While effective overall, this has had some limitations.

4 More information on USAID’s Development Credit Authority program (DCA) see http://www.usaid.gov/what-we-do/economic-growth-and-trade/development-credit-authority-putting-local-wealth-work 5 INDONESIA BANK DANAMON DCA GUARANTEE EVALUATION, September 2009; from the website cited above.

6 KENYA DCA 2006 AND 2010 GUARANTEES EVALUATION, FINAL REPORT – JUNE 2013; from the website cited above.

“LIM’s training filled in the gaps with corrective measures and solutions and sometimes validating strengths already…