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Manual on Key Performance Indicators for Development Finance Institutions Developed by: ADFIAP

Manual on Key Performance Indicators for Development Finance Institutions Developed by: ADFIAP. 28 th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands. ADFIAP…briefly. Asso. of Development Financing Institutions in Asia & the Pacific

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Manual on Key Performance Indicators for Development Finance Institutions Developed by: ADFIAP

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  1. Manualon Key Performance Indicators for Development Finance Institutions Developed by:ADFIAP 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  2. ADFIAP…briefly Asso. of Development Financing Institutions in Asia & the Pacific 131 member-institutions in 45 countries & territories Founded in 1976 during the 6th ADB conference for DFIs Founding member & Secretariat of the World Federation of DFIs An NGO in consultative status with the UN ECOSOC 2008 Winner of ASAE’s Associations Make a Better World Award Permanent secretariat in Manila, Philippines 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  3. 4-Pillared Sustainability Framework 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  4. 3 Development Roles & Service Units EXPERIENCES + TOOLS + COMMUNITY KNOWLEDGE + ADVOCACY + LINKAGES Sustainable Development Role the nation Business Development Role the institution Professional Development Role the person 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  5. Rationale for the Manual To develop a management and measurement system for DFIs that: encompasses the main & critical aspects of their “balancing” mission and mandate – operational sustainability & development impact. quantifies its development impact to include economic, social and environmental dimensions. 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  6. The Framework Part I: Mission of the DFI Part II: DFI Activities for Priority Sectors • Mission of the DFI • Adoption of the Code of Practice 8 KPIs for Development Investment Part III: External Benefits of DFI: Development Investment Part IV: Indirect Costs of DFI: Subsidies & Failures 7 KPIs for Subsidies & Failure/Longevity Rates of Start-ups 7 KPIs for Profitability of the DFI 5 KPIs for Portfolio Quality 4 KPIs for Capital Liquidity 4 KPIs for Efficiency & Productivity Part V: Internal KPIs: The DFI’s Efficiency Part VI: Benchmarking: Key Performance Areas 6 KPIs over 3 Target Sectors = 18 Benchmarks Part VII: Summary of Key Economic & Financial Performance for Successful & Efficient DFIs 4 KPIs for Economic Performance 8 KPIs for Environmental Performance 10 KPIs for Social Performance Part VIII: Economic, Social & Environmental Performance 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  7. KPIs for DFIs Dissected Key Performance Indicators (KPIs) for DFIs are the supporting analyticalsystem for planning and monitoring actual performance against budgets and benchmarks of Development Finance Institutions (DFIs). To be effective indicators, these KPIs must be guided by clearly-stated mission, priority sectors, performance targetsand goals. 6 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  8. Part I: Mission of the DFI • A.Overall Preparedness of the DFI to adopt KPIs • Pre-requisites: • Mission Statement • DFI-wide understanding of the mission & its implementation into programs for the target sectors • An installed and operating system of reviewing performance called KPI • Internal KPI for reviewing the sustainability of the DFI • External KPI for reviewing the impact of DFI on the target sector/country • B. Corporate Governance and the Code of Practice for DFIs • DFIs can lose all of their capital due to weak corporate governance structures and practices. ADFIAP is aware of the importance of good governance and has supported its members through seminars on the subject. An adoption of a Code of Practice is a must. 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  9. Part II: DFI Activities for Priority Sectors External KPIs measure the volume & quality of Development Investment (DI) of the DFI. Eventually, these investments are expected to benefit the target sectors. Part II explores the scope of the DFI operation, its strengths and constraints. KPIs measure the volume and quality of investments. Special target sectors like SMEs, entrepreneurs and new technology are given their own KPIs. 8 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  10. Part II: DFI Activities for Priority Sectors • A. The DFI offers the following services indicated with (): • Long-term loans • Advisory services (no fee) • Consulting services (for a fee) • Equity financing participation for new projects • Short-term loans • Import-export facility and financing • Residential housing loans • Consumer credit (automobile loans and personal loans) • Guarantee for loans of clients (stand-by credit facility) • Management of assets held in trust for clients • Others (please list) 9 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  11. Part II: DFI Activities for Priority Sectors B. The following sectors or beneficiaries are the priority target for the DFI: • (2)Social Groups • The poor (low income) • Women • SMEs • Small farmers, fishermen • Others (specify) • (1)Economic Sectors • Manufacturing • Forest products • Processing • Wholesale/Retail • Transport and Communication • Building and Construction • Real estate and lodging • Professional services • Social services • Agriculture (plantation) • Fishing • Others (please list) 10 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  12. Part III: External Benefits of the DFI - Development Investment • The objectives of a DFI are: • To improve the socio-economic status of people by making the right Development Investments (DIs) • To ensure sustainable performance, the DI is a higher risk than lending to seasoned commercial projects. On one hand, investing in development projects might strain the DFI’s capital position. On the other hand, a DFI might concentrate its investments on non-DI assets, forego its priority sectors and enjoy superior financial returns! Its weak performance over investing in priority sectors will be questioned. • For a DFI’s performance to be sound and sustainable, it must perform well in its development investments and still be financially sustainable. Dual goals are a reality in development finance. A DFI is organized to take risks on behalf of the government to benefit the people. 11 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  13. Part III: External Benefits of the DFI - Development Investment DIs are funds that DFIs commit to projects that benefit the target community/sector which commercial banks are unwilling to finance, being too risky. Examples of DIs are: • Debt or equity funds disbursed by DFIs and made available for investments with high development impact. Commercial banks do not finance projects with low short-term returns and high financial risk • Funds provided by official development agencies (ODA) for re-lending to target sectors • Funds that are committed for target sectors although not actually disbursed, e.g., “ear-marked” or guaranteed availability by a DFI • Guarantees issued to a commercial bank, underwriter, etc. in favor of a target beneficiary/sector to enable the latter to gain access to commercial bank funds or underwriter’s funds. • Infrastructure projects with very long term cost recovery • Residential housing loans • New technologies 12 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  14. Part III: External Benefits of the DFI - Development Investment The following loans are not DIs: • Loans that would have been made by commercial banks to financially feasible development projects, e.g., structured financing for high-risk, high- profit development projects like bio-ethanol production • All commercial short-term loans to established companies • All consumption loans to individuals except residential loans (which are classified as a DI) • Commercial real estate properties • All capital expansion projects with proven markets 13 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  15. Part III: External Benefits of the DFI - Development Investment 14 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  16. Part IV: Indirect Costs of DFI – Subsidies & Failures • Because DFIs are set up by the government to be exposed to high credit and operational risks, subsidy from government to DFIs is a reality from the beginning. Many DFIs are organized with government providing most of their capital. One can now restate the objectives of DFIs to include the issue of subsidies, as follows: • to improve the socio-economic status of people by making the right DI • to avoid subsidies and be financially and economically-sustainable 15 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  17. Part IV: Indirect Costs of DFI – Subsidies & Failures 16 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  18. Part V: Internal KPIs: The DFI’s Efficiency • Internal KPIs for DFIs are mainly financial ratios that are calculated to diagnose its condition and performance. The financial statements may be filled in using a customized electronic spreadsheet program (Excel) in order to generate the ratios that based on common definition. Interpretations, by KPI, follow: • Sustainability and Profitability (SP) • Portfolio Quality (PQ) • Capital / Liquidity (CL) • Efficiency and Productivity (EP) 17 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  19. Part V: Internal KPIs: The DFI’s Efficiency 18 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  20. Part V: Internal KPIs: The DFI’s Efficiency 19 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  21. Part VI: Benchmarking – Key Performance Areas • Benchmarks are useful for DFIs seeking acceptable target performance levels and good/best practice standards. The Community Development Institutions (CDFI) has published benchmarks representing current good practice amongst UK CDFIs intended to act as goals or targets, particularly for younger organizations. DFIs are very close to CDFIs in terms of orientation to development and their focus on the disadvantaged sectors. They can be used as initial benchmarks and possibly replaced by peer groups of DFIs. The benchmarking is done using a three-step technique as follows: • Determine KPIs for main market(s) served • The KPIs selected for benchmarking should be reviewed and adjusted • Review interlinked factors together to draw a complete picture. According to CDFI, strong performance on one benchmark may directly impact (sometimes negatively) performance over another 20 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  22. Part VI: Benchmarking – Key Performance Areas Example of Benchmarks: UK’s CDFI 21 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  23. Part VII: Summary of Key Economic and Financial Indicators • Key economic and financial performance indicators will show that a DFI, being an instrument of public policy, is a successful and sustainable institution when it: • meets its primary mission and achieves its development goals • its business activities are focused on priority target sectors • continues to invest in development projects with growing outreach in both number and geographic distribution of projects. In this way, more entrepreneurs open their small businesses • meets its social goals of developing SMEs and nurturing entrepreneurs and promoting new technologies • is independent of subsidy in whatever form after its initial set-up • is economically efficient and financially self-sustaining at a scale comparable to performance ratings of benchmarked DFIs 22 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  24. Part VIII: Economic, Social & Environmental Performance 23 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  25. Part VIII: Economic, Social & Environmental Performance 24 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  26. Part VIII: Economic, Social & Environmental Performance 25 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  27. Part VIII: Economic, Social & Environmental Performance 26 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

  28. Members as well as interested non-members of ADFIAP that would like to use and adopt this manual are requested to formally write the Association, being its proprietary developer, and sign a simple non-disclosure agreement as given in the manual. THANK YOU FOR YOUR ATTENTION! Final Word 28th ADFIP ANNUAL MEETINGS October 28 – November 1, 2013 Rarotonga, Cook Islands

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