investment outcome.<sup>7</sup> Expansion projects, projects with non-indigenous or foreign sponsors, non-exporting projects which had foreign currency revenues and larger projects (cost over $2.5million) had a higher proportion of satisfactory ratings. Investment outcomes were closely correlated with development outcomes, with 72% of the projects having the same ratings for both dimensions.

14. The performance of the overall AEF portfolio has also not been satisfactory, although it has improved over earlier program years FY95-98.<sup>8</sup> The failure rate, reflected in the low interest collection rate, the negative equity returns, and the high rate of write-offs and reserves, was high relative to the rest of IFC's portfolio.

15. In summary, the AEF has had poor financial results that limited the development impact of the projects financed. Only half the projects evaluated had significant development impact. The AEF has clearly helped to fill a large gap by financing projects which otherwise might not have proceeded, due to the lack of term finance in Africa and the reluctance of local financial intermediaries to assume the high risk of investing in SMEs. However, these results have been achieved at a considerable cost. The program has required a cross-subsidy of about $5 million a year to cover loses after operating expenses. This is high relative to the approval volume of $28 million and an average outstanding portfolio of $55 million during FY97-99. The evaluation concluded that while, to a large extent, these results are expected given the higher risk of SME investments and difficult economic environment in most African countries, direct IFC lending to SMEs will "ultimately not be profitable due to high delivery costs, and can help only a very limited number of enterprises (about 40-50 per year in the entire subSaharan Africa region)."<sup>9</sup> IFC has subsequently modified its strategy of financial support to SMEs by moving towards wholesale financing through intermediaries and phasing out direct financing of SMEs.

# **B. Micro-finance**

16. More than 10 million households in the developing world are currently benefiting from access to micro-credit. Micro-finance institutions have used a variety of approaches to reach these households. In addition, they have also used dynamic incentives, regular repayment schedules, and collateral substitutes to help maintain high repayment rates. However, while these programs have been remarkably successful in their outreach and loan recovery, they have had a mixed record on sustainability.

17. A recent survey of the performance of 72 micro-finance programs with a commitment to financial sustainability found most to be operationally, but not financially,

> 7 Satisfactory loans were those which were current in their payments and had no reserves. Any investment that had specific reserves or was in arrears was rated less than satisfactory. Equity investments were rated based on their estimated IRR relative to the notional interest rate on a loan. The main causes for poor performance were: a) inability to compete; b) adverse market conditions, including wrong location, declining or unexpectedly low prices, inability to devote much time and effort to marketing; c) sponsor’s weakness: many entrepreneurs did not have sufficient resources to put into the enterprise in the event of a cost overrun or weak financial performance; and d) poor policy environment and inadequate infrastructure.

> 8 Detailed data on financial results are available in IFC (2000).

> 9 IFC (2000), _page 3-4._

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