Assessing the performance of Development Finance Institutions

Added 01 Jul 2015
Delivering development results is the mandated raison d’être of Development Finance Institutions (DFIs). Without these results, DFIs have no reason to exist as they might as well be replicating the work of commercial institutions. As a result, it won’t surprise anyone that DFIs are facing constant pressure by governments, tax payers, civil society organisations and the communities where they work to demonstrate their achievements in reducing poverty and inequality. But this has proven to be easier said than done. 

Monitoring and evaluation

Effective monitoring and evaluation (M&E) systems incorporated into DFI projects allow them to identify what changes – especially benefits – have been achieved either directly or indirectly through their activities and investments, and to make alterations where necessary. In ideal circumstances, M&E systems serve as accountability tools that enable DFIs to improve their performance and take on board lessons learnt. 

DFIs have developed different M&E systems. At the multilateral level the International Finance Corporation (IFC), the World Bank’s private sector lending arm, has the Development Outcomes Tracking System (DOTS) to measure the development effectiveness of its investment and advisory services. The European Investment Bank (EIB) has set up the Results Measurement Framework (ReM) to enhance reporting to shareholders on the results and impact of the EIB’s interventions outside the EU. At the bilateral level the Dutch FMO uses an internally developed methodology, whereas the German DEG monitors and evaluates its activities on the basis of the Corporate-Policy Project Rating (GPR) methodology which is currently being used by 15 other DFIs, including its French counterpart Proparco. 

However, the crucial question remains unanswered: do these systems really tell us anything? 

As it turns out not in all cases. Previous evaluation reports have shown that, despite the use of M&E systems, the development impact of DFI operations remains unclear – particularly when lending through financial intermediaries such as commercial banks and private equity funds. In the case of the IFC, a 2013 report by the Independent Evaluation Group (IEG) – the World Bank's arm’s length internal watch dog – found that the “IFC has limited knowledge about the underlying results on its end-beneficiaries, and any claims would be difficult to attribute to the IFC intervention”. 

How to do it better?

So how can M&E systems be improved to increase DFIs’ knowledge about the underlying development outcomes of their activities? Against this backdrop, we started to think about what could serve as an effective framework to assess DFIs’ M&E systems – a solution that could find answers to questions such as: 

  • Is the DFI’s M&E system looking at critical governance criteria such as ownership, stakeholder involvement, and transparency & accountability? 
  • Is the system effective in forcing the DFI to take on board lessons learnt and change its behaviour? 
  • Does the M&E system apply a methodology adequate enough for measuring the “financial additionality” of investments made by the DFI?
This exercise resulted in a briefing, entitled “Monitoring and evaluation at Development Finance Institutions”. The briefing puts forward the following assessment framework: 

Assessment framework for M&E systems

The framework consists of four main criteria against which DFIs’ M&E systems should be measured: 

1. Governance
2. Development impact
3. Effectiveness
4. Financial additionality

Integrating these criteria and sub-criteria into M&E systems would be a good starting point to find out whether DFIs take into account issues including country-owned development strategies that reflect the views of local stakeholders (including governments, parliaments, trade unions, communities and the local private sector) and involve them throughout the project cycle. The framework should also help M&E systems to capture the extent that DFIs integrate independent findings through any formal “lessons learnt” mechanism or possess the necessary tools to measure the financial added value of their support. 

This briefing should be seen as an invitation for civil society organisations and DFIs to join the discussion on the effectiveness of M&E systems. This thought-provoking exercise is our contribution to this process.
Click here to read the briefing.