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

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Manualon

Key Performance Indicators for

Development Finance Institutions

Developed by:ADFIAP

28th ADFIP ANNUAL MEETINGSOctober 28 – November 1, 2013

Rarotonga, Cook Islands

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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



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4-Pillared Sustainability Framework



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Sustainable Development Role

Business Development Role

Professional Development Role

the institution

the person

the nation

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3 Development Roles & Service Units



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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.



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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 DFI’s 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-ups7 KPIs for Profitability of the DFI

5 KPIs for Portfolio Quality4 KPIs for Capital Liquidity4 KPIs for Efficiency & Productivity

6 KPIs over 3 Target Sectors= 18 Benchmarks

4 KPIs for Economic Performance8 KPIs for Environmental Performance10 KPIs for Social Performance

The Framework



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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.



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Part I: Mission of the DFI

A. Overall Preparedness of the DFI to adopt KPIsPre-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 DFIsDFIs 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.



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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.



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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)




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(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:




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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 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.



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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

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:




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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




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Code Key Performance Indicator

KPI Definition & Formula

DI-1DI-2DI-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 AssetsValue of DI by Instrument / Total Value of DIValue of DI for Target Economic Sectors / Total Value of DINo. of DI per Economic Sector / Total Number of DI

Total Value of DI per sector / No. of DI by Economic SectorValue of DI per Sector / Total Value of DI + Com Bank LoansValue 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




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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 DI2. to avoid subsidies and be financially and economically-sustainable

Part IV: Indirect Costs of DFI – Subsidies & Failures



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Code Key Performance Indicator Ratio KPI 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 Beneficiaries7. Longevity of Start up

Businesses under DFI Support

Total Value of Subsidy to DFI / Total Revenues from Loans & Equity InvestmentsTotal Subsidy to the DFI(s) / Average Loan Portfolio (L) x Yield on Loans (i)Subsidy-Adjusted Profit = (Accounting Profits – Profit Grants) / Average EquitySubsidy-Adjusted Profit / Average Total Assets

Total Loan to New Business / Total LoanNumber 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



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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)




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Key Performance

AreaCode Key Performance

Indicator RatioKPI Definition and Formula

Sustainability and Profitability

(SP)

SP-1SP-2

SP-3

SP-4SP-5

SP-6SP-7

1.Loan Portfolio Self-sufficiency2.Operational Self-sufficiency

3.Yield on Gross Loans Portfolio4.Average Cost of Deposits5. Average Cost of Borrowings

6. Net Income / Capital7. Net Income / Total Assets

Revenue from loan portfolio / Total expensesRevenue from all earned income / Total expenses Revenue from loan portfolio / average gross loan portfolioInterest expense on deposits / average depositsInterest expense on borrowings / average borrowingsNet income / Average capitalNet income / Average assets




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Key Performance Area Code

Key PerformanceIndicator Ratio KPI Definition and Formula

Portfolio Quality(PQ)

PQ-1PQ-2PQ-3PQ-4PQ-5

1.Rescheduled Portfolio at Risk2.Annual Write-off Rate3.Loan Loss Coverage (Times)4.Loan Loss Provision / Total Loans5.Provision for Loss / Net Interest Earnings

Rescheduled portfolio at risk / Gross loan portfolioNet loan losses written off / Gross loan portfolioOperating income before loan loss provision / Loan loss provisionLoan loss provision / Average value of loans portfolioLoan loss provision / Net interest earnings

Capital / Liquidity(CL)

CL-1CL-2CL-3CL-4CL-5

1.Current Ratio2.Capital to Assets3.Capital to Loans4.Capital to Deposits5.Borrowed Funds to Assets

Current assets / Current liabilitiesAverage capital / Average assetsAverage capital / Average loansAverage capital / Average depositsAverage borrowings / Average assets

Efficiency and Productivity

(EP)

EP-1EP-2EP-3EP-4

1.Loan officer productivity2.Average disbursed loan size3.Cost per active loan outstanding4.Operating expense ratio

No. of active borrowers / number of loan officersValue of loans disbursed / Total number of loans disbursedOperating expenses / No. of active loansOperating expense / Average gross loan portfolio




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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



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DFITarget

Sectors

Loan Fund Self-

sufficiency

Gross Yield

Annual Write/Off

Loan Officer

Productivity

Operating Expense

Operational Self-

sufficiency

Micro-finance 35% 16.50% 9% 100 64% 40%

Small Business 50% 14.50% 12% 82 48% 55%

Social 48% 5.50% 3% 20 18% 75%

Example of Benchmarks: UK’s CDFI

Part VI: Benchmarking – Key Performance Areas



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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 goalsits 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 businessesmeets its social goals of developing SMEs and nurturing entrepreneurs and promoting new technologiesis independent of subsidy in whatever form after its initial set-upis economically efficient and financially self-sustaining at a scale comparable to performance ratings of benchmarked DFIs



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ECONOMIC Code Description of Performance Indicator (GRI Code)

Economic Performance

EC2Financial implications and other risks and opportunities for the organization’s activities due to climate change (EC2)

EC4Significant financial assistance received from government (EC4)

Market Presence EC7

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)




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ENVIRONMENT Code Description 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)

EnergyEN4 Indirect energy consumption by primary source. (EN4)

EN51 Energy saved due to conservation and efficiency improvements (EN5l)

Water EN8 Total water withdrawal by source (EN8)

Biodiversity EN11

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 Services EN26Initiatives to mitigate environmental impacts or products and services, and extent of impact mitigation (EN26)




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SOCIAL Code Description of Performance Indicator (GRI Code)

Employment LA1Total workforce by employment type, employment contract, and region (LA1)

Management-Labor Relations

LA4Percentage 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

LA10Average hours of training per year per employee by employee category (LA10)

LA14Ratio of basic salary of men to women by employee category (LA14)




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SOCIAL CodeDescription of Performance Indicator (GRI

Code)

Security Practices HR8

Percentage of security personnel trained in the organization’s 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)

Community SO1

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)

SO3Percentage of employees trained in organization’s anti-corruption policies and procedures (SO3)




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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!



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

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