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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

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ADFIAPbriefly Asso. of Development Financing Institutions in Asia & the Pacific 131 member-institutions in 45 countries & territories Founded in 1976 during the 6 th 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 ASAEs Associations Make a Better World Award Permanent secretariat in Manila, Philippines 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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

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

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Rationale for the Manual To develop a management and measurement system for DFIs that: 1.encompasses the main & critical aspects of their balancing mission and mandate operational sustainability & development impact. 2.quantifies its development impact to include economic, social and environmental dimensions. 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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5 Part I: Mission of the DFI Part II: DFI Activities for Priority Sectors Part III: External Benefits of DFI: Development Investment Part IV: Indirect Costs of DFI: Subsidies & Failures Part V: Internal KPIs: The DFIs Efficiency Part VI: Benchmarking: Key Performance Areas Part VII: Summary of Key Economic & Financial Performance for Successful & Efficient DFIs Part VIII: Economic, Social & Environmental Performance Mission of the DFI Adoption of the Code of Practice 8 KPIs for Development Investment 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 6 KPIs over 3 Target Sectors = 18 Benchmarks 4 KPIs for Economic Performance 8 KPIs for Environmental Performance 10 KPIs for Social Performance The Framework 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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6 6 KPIs for DFIs Dissected Key Performance Indicators (KPIs) for DFIs are the supporting analytical system 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 targets and goals. 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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7 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. 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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8 8 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. 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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9 9 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) Part II: DFI Activities for Priority Sectors 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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10 (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) (2) Social Groups The poor (low income) Women SMEs Small farmers, fishermen Others (specify) B. The following sectors or beneficiaries are the priority target for the DFI: Part II: DFI Activities for Priority Sectors 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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11 Part III: External Benefits of the DFI - Development Investment The objectives of a DFI are: 1.To improve the socio-economic status of people by making the right Development Investments (DIs) 2.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 DFIs 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 DFIs 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. 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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12 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 underwriters funds. Infrastructure projects with very long term cost recovery Residential housing loans New technologies 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: Part III: External Benefits of the DFI - Development Investment 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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

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14 Code Key Performance Indicator KPI Definition & Formula DI-1 DI-2 DI-3 DI-4 DI-5 DI-6 DI-7 DI-8 1.DI Ratio (%) 2.DI Instrument (%) 3.Target Economic Sector DI (%) 4.Distribution of DI by Sector (%) 5.Average Size of DI ($ per sector) 6.Share of DFI in Each Economic Sector (%) 7.Contribution to Entrepreneurial Development CED Loans 8.Contribution to Entrepreneurial Development CED - Advisory Development Investments / Average Total Assets Value of DI by Instrument / Total Value of DI Value of DI for Target Economic Sectors / Total Value of DI No. of DI per Economic Sector / Total Number of DI Total Value of DI per sector / No. of DI by Economic Sector Value of DI per Sector / Total Value of DI + Com Bank Loans Value of DI committed for funding investment in new business / Total Amount of DI Outreach: Number of new businesses/ assisted by the DFI Number of clients assisted by the DFI to set up new business Part III: External Benefits of the DFI - Development Investment 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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15 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: 1.to improve the socio-economic status of people by making the right DI 2.to avoid subsidies and be financially and economically-sustainable Part IV: Indirect Costs of DFI Subsidies & Failures 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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16 CodeKey Performance Indicator RatioKPI Definition & Formula SD-1 SD-2 SD-3 SD-4 SD-5 SD-6 SD-7 1. Subsidy Dependence Ratio 2. Subsidy Dependence Index 3. Subsidy-adjusted Return on Equity (SA-ROE) 4. Subsidy-adjusted Return on Asset (SA-ROA) 5. Investment Loans to New Business (3 years in business) 6. Failure Rates of DI Beneficiaries 7. Longevity of Start up Businesses under DFI Support Total Value of Subsidy to DFI / Total Revenues from Loans & Equity Investments Total Subsidy to the DFI(s) / Average Loan Portfolio (L) x Yield on Loans (i) Subsidy-Adjusted Profit = (Accounting Profits Profit Grants) / Average Equity Subsidy-Adjusted Profit / Average Total Assets Total Loan to New Business / Total Loan Number of Failures During the Year / Average Total Number of DI Beneficiaries Longevity of Start-up DFI-supported Businesses over a 10 year period or longer Part IV: Indirect Costs of DFI Subsidies & Failures 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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17 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) Part V: Internal KPIs: The DFIs Efficiency 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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18 Key Performance Area Code Key Performance Indicator Ratio KPI Definition and Formula Sustainability and Profitability (SP) SP-1 SP-2 SP-3 SP-4 SP-5 SP-6 SP-7 1.Loan Portfolio Self-sufficiency 2.Operational Self-sufficiency 3.Yield on Gross Loans Portfolio 4.Average Cost of Deposits 5. Average Cost of Borrowings 6. Net Income / Capital 7. Net Income / Total Assets Revenue from loan portfolio / Total expenses Revenue from all earned income / Total expenses Revenue from loan portfolio / average gross loan portfolio Interest expense on deposits / average deposits Interest expense on borrowings / average borrowings Net income / Average capital Net income / Average assets Part V: Internal KPIs: The DFIs Efficiency 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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19 Key Performance AreaCode Key Performance Indicator Ratio KPI Definition and Formula Portfolio Quality (PQ) PQ-1 PQ-2 PQ-3 PQ-4 PQ-5 1.Rescheduled Portfolio at Risk 2.Annual Write-off Rate 3.Loan Loss Coverage (Times) 4.Loan Loss Provision / Total Loans 5.Provision for Loss / Net Interest Earnings Rescheduled portfolio at risk / Gross loan portfolio Net loan losses written off / Gross loan portfolio Operating income before loan loss provision / Loan loss provision Loan loss provision / Average value of loans portfolio Loan loss provision / Net interest earnings Capital / Liquidity (CL) CL-1 CL-2 CL-3 CL-4 CL-5 1.Current Ratio 2.Capital to Assets 3.Capital to Loans 4.Capital to Deposits 5.Borrowed Funds to Assets Current assets / Current liabilities Average capital / Average assets Average capital / Average loans Average capital / Average deposits Average borrowings / Average assets Efficiency and Productivity (EP) EP-1 EP-2 EP-3 EP-4 1.Loan officer productivity 2.Average disbursed loan size 3.Cost per active loan outstanding 4.Operating expense ratio No. of active borrowers / number of loan officers Value of loans disbursed / Total number of loans disbursed Operating expenses / No. of active loans Operating expense / Average gross loan portfolio Part V: Internal KPIs: The DFIs Efficiency 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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20 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 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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21 DFI Target Sectors Loan Fund Self- sufficiency Gross Yield Annual Write/Off Loan Officer Productivity Operating Expense Operational Self- sufficiency Micro- finance 35%16.50%9%10064%40% Small Business 50%14.50%12%8248%55% Social 48%5.50%3%2018%75% Example of Benchmarks: UKs CDFI Part VI: Benchmarking Key Performance Areas 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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22 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 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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23 ECONOMICCodeDescription of Performance Indicator (GRI Code) Economic Performance EC2 Financial implications and other risks and opportunities for the organizations activities due to climate change (EC2) EC4 Significant financial assistance received from government (EC4) Market PresenceEC7 Procedures for local hiring and proportion of senior management hired from the local community at significant locations of operation. (EC7) Indirect Economic Impacts EC8 Development and impact of infrastructure investments and services provided primarily for public benefit through commercial, in-kind, or pro bono engagement. (EC8) Part VIII: Economic, Social & Environmental Performance 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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24 ENVIRONMENTCodeDescription of Performance Indicator (GRI Code) Materials EN1 Materials used by weight or volume (EN1) EN2 Percentage of materials used that are recycled input materials (EN2) Energy EN4 Indirect energy consumption by primary source. (EN4) EN51 Energy saved due to conservation and efficiency improvements (EN5l) WaterEN8 Total water withdrawal by source (EN8) BiodiversityEN11 Location and size of land owned, leased, managed in, or adjacent to, protected areas and areas of high biodiversity value outside protected areas (EN11) Emissions, Effluents, and Wastes EN19 Emissions of ozone-depleting substances by weight (EN19) Products and ServicesEN26 Initiatives to mitigate environmental impacts or products and services, and extent of impact mitigation (EN26) Part VIII: Economic, Social & Environmental Performance 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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25 SOCIALCodeDescription of Performance Indicator (GRI Code) EmploymentLA1 Total workforce by employment type, employment contract, and region (LA1) Management- Labor Relations LA4 Percentage of employees covered by collective bargaining agreements (LA4) LA6 Percentage of total workforce represented in formal joint management-worker health and safety committees that help monitor and advise on occupational health and safety programs (LA6) Education and Training LA10 Average hours of training per year per employee by employee category (LA10) LA14 Ratio of basic salary of men to women by employee category (LA14) Part VIII: Economic, Social & Environmental Performance 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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26 SOCIALCode Description of Performance Indicator (GRI Code) Security Practices HR8 Percentage of security personnel trained in the organizations policies or procedures concerning aspects of human rights that are relevant to operations (HR8) Indigenous Rights HR9 Total number of incidents of violations involving rights of indigenous people and actions taken (HR9) CommunitySO1 Nature, scope, and effectiveness of any programs and practices that assess and mange the impacts of operations on communities, including entering, operating, and exiting (SO1) Corruption SO2 Percentage and total number of business units analyzed for risks related to corruption (SO2) SO3 Percentage of employees trained in organizations anti-corruption policies and procedures (SO3) Part VIII: Economic, Social & Environmental Performance 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands

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27 Final Word 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! 28 th ADFIP ANNUAL MEETINGS October 28 November 1, 2013 Rarotonga, Cook Islands