~

DONORBRIEF
No.5,July 2002
Helping to Improve Donor Effectiveness in Microfinance
APEXINSTITUTIONSINMICROFINANCE
Whatisanapexinstitution?
An apex institution is a second-tierorwholesaleorganization thatchannels funding (grants, loans, guarantees)
to multiple microfinance institutions (MFls) in a single country or region. Funding may be provided with or
withoutsupportingtechnical services.
Whyareapexinstitutionsattractivetodonors?
Donors often use apex institutions to deliver funding and technical services in countries where MFls appear
too small or numerous for direct funding relationships. Apexes are attractive because they permit donors to
pass the difficult and time-consuming task ofMFI selection to a local institution that is assumed to have the
requisite skills.
Overall,how haveapexesperformed?
The majority ofapex institutions have unfortunately produced disappointing results, often because they were
setup in countrieswithoutacritical massofgood MFlswith the capacitytoabsorbapex funding.
Whatarethecharacteristicsofa goodapexinstitution?
1. Theapexhasacleargoal ofnurturingthedevelopmentofsustainablemicrofinanceproviders
(includingbanks). Evidence showsthatdevelopingpermanent,sustainable MFls-notmaximizingthe
numberofMFls-isthe mosteffectivewayto expand the numberofpoorpeopleserved.
2. Theapex is politicallyindependent,withastrongboard able to protectthe institution from political
intervention,thusensuringthatmanagementcan make decisionson technical grounds.
3. Theapex receives fundingbasedon a realisticassessmentofthenumberofqualified MFIsin the
countryorregion thatcan absorbapex funding.
4. ApexfundingofMFls is basedonclearselection criteria,suchas portfolioquality,depth ofoutreach,
managementquality,and progresstowardeventual sustainability. Theapex musthave the authorityto
discontinuefundingto MFlsthatfail to meetthese criteria.
5. Apex loansare tailoredtothecashflow patternsand planningneedsofMFIs,not pre-setdisbursement
plans.
6. TheapexmonitorsMFlson the basisofa few, preciselydefined performancetargetsthatareseriously
enforced.
7. Apex managementis ofvery high quality, possessinga blend ofmicrofinanceexpertise, managerial and
financial skills,and integrity.
Commonchallengesfaced byapexinstitutions:
Apex planners almost always overestimate the number ofMF/s that can meet sound selection criteria.
Thenumberofviable MFls is agenuineconstraint for mostapexes. Even when PKSF,an apex in
Bangladesh, used broadeligibilitycriteria,only 10%ofinitial applicantsqualified for funding. Apexes
in Kenya(K-Rep),the Dominican Republic(FondoMicro),Colombia(Fundaci6nCarvajal)and
Pakistan (PPAF)haveall had more moneythanqualified MFlsto fund.
Replicating a 'successful' apex model in another context is rarely successful. Amongthe twenty-eight
apexesstudied by Fred Levy (see sources below) from Argentinato Yemen, no such thingasa"one-
size-fits-all" model wasfound.
ConsultativeGroupto Assistthe Poorest 1818 HStreet, NW Washington, DC 20433
Tel: 2024739594 Fax: 2025223744 E-mail: cgap@worldbank.org Web: www.cgap.org
Donors and other stakeholders pressure apexes tfJ disburse funds.quiclcly. Apex institutionsthatare
seriousaboutselectioncriteriaoften cannotdisburse funds quickly they typicallyfind fewer
qualified MFlsthan wereanticipated. Otherapexessuccumbto disbursement pressure and fund low-
quality MFls.
Political pressure adversely affects MFlfunding decisions. Government involvement in an apex can
compromise its mission by inducingtheapex to disburse funds to unqualified MFls. In Sri Lanka.
NDTFsuffered heavy political intervention. As aresult, almost none ofthe MFls it funded met the
apex'sown minimum criteriaand the outreach ofthose MFlswas limited.
Apexes rarely build bridges between MFls and commercial funding sources. Some stakeholders
assume apexeswill pavethe way for commercial funding to MFls, butthisgoal is rarely included in
the apex mission. Theavailabilityofcheaperapex funding is, in fact, more likelyto reduce incentives
for MFlsto seekcommercial funding.
Apexfunding ofcommercial banks andJinance companies rarely encourages their continuedprovision
ofmicrofinance services after the funding ends. As theexperienceofGlobalMicro in Paraguay
demonstrates, microlendingby banks has ahigh probabilityofcontinuingonly when abank'sown
money is atriskand whenapex financing is packaged with intensivetechnical assistance.
How candonorssupportthedevelopmentofgood apex institutions?
Apex Design
Priorto creatingan apex, perform arigorous financial and operational analysisofafairly large sample
ofthe MFlsthe apexwould fund. Thisanalysisshouldalso helpdetermine the size ofthe apex.
Minimizedisbursementpressure. Where possible, provide modest funding at first, and base later
increaseson demonstrateddemand from quality MFls. 'Where initial funding must be large, lengthen
thedisbursementperiodand educateall stakeholdersnotto expect large disbursements in the early
years. Ifpractical,createatemporary investmentmechanism (e.g. social-purposegovernmentbonds)
wheretheapexcan place unused funds without provokingcriticism about idle money.
Identifyappropriateapex managersduringthe design phase ratherthan assumingthat high-quality
apex managementcan be found later.
Apex-Donol' Relationship
Strengthenthe strategic focus on viable MFls. Improveapex tools for measuringthe qualityofMFI
loan portfolios,the financial sustainabilityoftheiroperations,and theirclientoutreach.
Focusevaluationofthe apex and donororgovernment reporting requirementson such goalsas MFI
portfolioquality,sustainability,and outreach.
Tie future donororgovernmental disbursementsto apex performance.
Ensure political independenceoftheapex. Limitoreliminategovernment participationon the board
and name privatedirectorswho are both powerful and committed to the apex'stechnical
independence.

Reduce restrictionson how MFls use apex funds, exceptwheredetailed reportingon the use offunds
is necessaryto preventfraud.
MonitorMFlsaccordingto institutional performancetargetscontained in theirbusiness plans. Focus
the relationship(appraisal,contractrequirements, reporting, and monitoring)on the institutional
viabilityofthe MFI.
This Donor Briefis based on Fred Levy, "Apex Institutions in Microfinance," CGAP Occasional Paper No.6(January 2002)
and "MicrofinanceApex Assessment Framework" by Richard Rosenbergand Brigit Helms (CGAP, forthcoming 2002).
Where to go for more information, Papers: "Water, Water, Everywhere...." CGAP Donor BriefNo. 3 (May 2002): "The Second Story:
Wholesale Microfinance in Latin America," by Marguerite Berger, Allison Beck. and Maria Lucia L10reda (lADS paper. forthcoming
September 2002). Websites: See www.microfinancegatcwav.org/vicwpoint archivc.htm for "Capital vs. Capacity" discussion and
Format for Appraisal of Microflnance Institutions atwww.cgap.org/html/ptechnicalguides04.html.
CGAP DonorTeam: Brigit Helms - bhelms@worldbank.org
Alexia Latortue - alatortue@worldbank.org Natasa Goronja- ngoronja@worldbank.org