Project Completion Report

PCR: TIM 34508

Microfinance Development Project (Grant 8186-TIM[TF]) in the Democratic Republic of Timor-Leste October 2005

CURRENCY EQUIVALENTS

Currency Unit – US dollar ($)

As of 20 August 2001, the legal tender of Timor-Leste is the US dollar.

ABBREVIATIONS ADB – Asian Development Bank BPA – Banking and Payments Authority BME – benefit monitoring and evaluation CGAP – Consultative Group to Assist the Poor CITD – Commerce, Industry and Trade Division CU – credit union CUF – credit union federation EA – executing agency GDP – gross domestic product IDA – International Development Association IMFTL – Instituicao de Microfinancas de Timor-Leste MFI – microfinance institution MFB – microfinance bank MIS – management information system NBFI – nonbank financial institutions NGO – nongovernment organization PCC – project coordination committee PMU – project management unit TA – technical assistance TFET – Trust Fund for East Timor UNTAET – United Nations Transitional Administration in East Timor

NOTES

(i) The fiscal year (FY) of the Government ends on 30 June.

(ii) In this report, “$” refers to US dollars.

CONTENTS

Page

BASIC DATA i

MAP v

I. PROJECT DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Project Outputs 3 C. Project Costs 5 D. Disbursement and Procurement 5 E. Project Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 6 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 7 J. Performance of Consultants, Contractors, and Suppliers 8 K. Performance of the Grant Recipient and the Executing Agency 8 L. Performance of the Asian Development Bank 8

III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Efficacy in Achievement of Purpose 9 C. Efficiency in Achievement of Outputs and Purpose 10 D. Preliminary Assessment of Sustainability 10 E. Institutional Development and Other Impacts 11

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12 A. Overall Assessment 12 B. Lessons Learned 12 C. Recommendations 13

APPENDIXES 1. Expected and Actual Outputs 14 2. Project Implementation Schedule 19 3. Status of Compliance with Grant Covenants 20 4. Technical Assistance Completion Report 26 5. Summary of Socioeconomic Impact Assessment 28 6. Financial Analysis of Selected Microenterprises 30 7. Instituicao de Microfinancas de Timor-Leste Financial Performance 31 8. Overall Assessment of the Project 40

BASIC DATA

A. Grant Identification 1. Country

Timor-Leste

2. Grant Number Grant 8186-TIM(TF)

3. Project Title Microfinance Development Project

4. Borrower Democratic Republic of Timor-Leste

5. Executing Agency Ministry of Development and Environment

6. Amount of Grant $4 million

7. Project Completion Report Number PCR:TIM 34508 B. Grant Data 1. Appraisal – Date Started – Date Completed

8 September 2000 15 September 2000

2. Grant Negotiations – Date Started – Date Completed

Not applicable

3. Date of Board Approval 6 December 2000

4. Date of Grant Agreement 18 December 2000 5. Date of Grant Effectiveness – In Grant Agreement – Actual – Number of Extensions

18 March 2001 18 December 2000 none

6. Closing Date – In Grant Agreement – Actual – Number of Extensions

31 December 2003 14 July 2005 3

7. Terms of Grant – Interest Rate – Maturity (number of years) – Grace Period (number of years

Not applicable

8. Terms of Relending (if any) – Interest Rate – Maturity (number of years) – Grace Period (number of years) – Second-Step Borrower

Not applicable

PCR = project completion report, TF = trust fund, TIM = Timor-Leste. Source: Asian Development Bank estimates.

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9. Disbursements a. Dates Initial Disbursement

15 March 2001

Final Disbursement

14 July 2005

Time Interval

52 months Effective Date

18 December 2000

Original Closing Date

31 December 2003

Time Interval

36 months b. Amount ($) Category

Original

Allocation

Revised

Allocationa

Last Revised

Allocation

Net Amount

Available

Amount

Disbursed

Undisbursed

Balance

01 MFI (Capitalization and Credit Line)

3,500,000 2,300,000 2,858,241 2,858,241 2,858,241 0

02 Credit Lines: Credit Unions

2,500,000 150,000 54,539 54,539 54,539 0

03 Training 330,000 200,000 164,457 164,457 164,457 0 04 Consulting Services 790,000 800,000 712,736 712,736 712,736 0 05 Vehicle, Equipment, and Supplies

360,000 360,000 110,385 110,385 110,385 0

06 Administrative Support for PMU

160,000 160,000 99,642 99,642 99,642 0

07 Unallocated 80,000 30,000 0 0 0 0 Total 7,720,000 4,000,000b 4,000,000 4,000,000 4,000,000 0 IDA = International Development Association, MFI = microfinance institution, PMU = project management unit. a Credit Lines were not provided; capacity building and training were undertaken instead. b Drawdown from the World Bank IDA to this Project was only $4 million. Source: Asian Development Bank estimates.

10. Local Costs (Financed) - Amount ($) 0 - Percent of Local Costs 0 - Percent of Total Cost 0 C. Project Data

1. Project Cost ($ million) Cost Appraisal Estimate Actual

Foreign Exchange Cost 4.0 4.0 Local Currency Cost 0.0 0.0 Total 4.0 4.0

2. Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs Borrower Financed 0.0 0.0 ADB Financed 0.0 0.0 Other External Financing (TFET) 4.0 4.0 Sub-total 4.0 4.0 IDC Costs 0.0 0.0 Sub-total 0.0 0.0 Total 4.0 4.0 ADB = Asian Development Bank, IDC = interest during construction, TFET = Trust Fund for East Timor.

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3. Cost Breakdown by Project Component ($ million)

Component Appraisal Estimate

Revised Actual

A. Base Costs 1. Institutional Building/Strengthening a. Credit Unions/Credit Union Federation 0.83 0.35 0.00 b. Microfinance Bank 0.21 1.16 0.65a

2. Provision for Microfinance Activities a. Credit Line for Credit Unions 2.50 0.00 0.00 b. Equity for Microfinance Bank 3.50 2.30 2.86 3. Project Management 0.60 0.16 0.49b

Subtotal (A) 7.64 3.97 4.00 B. Contingencies 1. Physical 0.05 0.00 0.00 2. Price 0.03 0.00 0.00 Subtotal (B) 0.08 0.03 0.00 Total A and B 7.72 4.00 4.00 Note: Total drawdown made to the Project by WB/IDA was only $4.0 million. a Inclusive of training, consulting services, vehicles, and equipment. b Inclusive of the international project manager’s salary. 4. Project Schedule Item Actual Date of Contract with Consultants 30 April 2001–

31 December 2004 Completion of Engineering Designs Civil Works Contract Date of Award Completion of Work Equipment and Supplies Dates First Procurement May 2001 Last Procurement December 2004 Completion of Equipment Installation Start of Operations Completion of Tests and Commissioninga Beginning of Start-Upa a Due to the emergency nature of this Project, other milestone dates cannot be determined. 5. Project Performance Report Ratings

Ratings Implementation Period

Development Objectives

Implementation Progress

From 18 December 2000 to 31 December 2004 Satisfactory Satisfactory

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D. Data on Asian Development Bank Missions Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Membersa

Review Mission 1 20–27 February 2001 4 32 c, d, f, g Review Mission 2 2–10 August 2001 2 18 c, g Review Mission 3 9–15 February 2002 2 14 c, g Review Mission 4 8–14 November 2002 1 7 c Review Mission 5 27 Nov.–3 Dec. 2003 2 14 c, e Review Mission 6 27 March–5 April 2003 2 20 c, b Review Mission 7 14–22 April 2004 1 9 c Review Mission 8 27 July–5 August 2004 2 20 c, a Review Mission 9 3–8 October 2004 1 6 c Project Completion Reviewb 13 June 2005–1 July

2005 2 24 c, f

a a - country programs specialist, b - Timor-Leste desk officer, c - programs officer, d - project analyst, e – lead microfinance specialist, f – microfinance consultant, g - project manager.

b The Project Completion Report was prepared by Kunhamboo Kannan, Principal Country Programs Specialist; and Columbus Maquito, Microfinance Consultant. Noris Galang, Associate Project Analyst, prepared the necessary basic information for the PCR finalization.

Source: Asian Development Bank estimates.

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I. PROJECT DESCRIPTION A. Background and Rationale 1. Civil unrest caused widespread poverty in Timor-Leste following the independence referendum in August 1999. It displaced more than half the population, destroyed about 70% of physical infrastructure and private buildings, and caused extensive disruption to livelihoods. The United Nations Transitional Administration in East Timor (UNTAET) was established in October 1999 to restore stability and undertake reconstruction. Donors pledged financial assistance to the Trust Fund for East Timor (TFET) to support Timor-Leste’s reconstruction and the Asian Development Bank (ADB) was made responsible for managing TFET microfinance interventions. 2. There was very little economic activity after the civil unrest and the gross domestic product (GDP) declined between 25% and 50%. In early 2000, GDP per capita was estimated at less than $300 per year and about 60% of households had monthly incomes of less than $20. In the financial sector, a vacuum was created by the departure of Indonesian banks1 and lack of other financial service providers, particularly for the poor. Lack of access to credit and inadequate financial services were a major constraint to employment creation, especially affecting poor households. To address this problem, ADB extended technical assistance (TA) to study the feasibility of providing sustainable microfinance services.2 The Microfinance Development Project (the Project) funded from TFET—with an attached ADB grant-funded TA3—was designed to assist the transitional administration to support economic recovery. B. Project Objectives and Scope 3. The Project’s goal was to reduce poverty by developing a sustainable microfinance system that is responsive to the needs of the poor. The Project’s objectives were to (i) help strengthen the microfinance policy and legal framework; (ii) raise the social awareness and confidence of the poor, especially women; (iii) develop knowledge and skills of the poor to implement income-generating activities; (iv) strengthen and rehabilitate credit unions (CUs); and (v) establish a sustainable microfinance bank. The Project aimed to reach about 26% of the total 78,000 poor households, including 46,000 households headed by women. 4. The Project has three related components:

(i) Institutional building and strengthening. The component will (a) establish a sustainable microfinance bank (MFB) with capitalization from TFET; (b) rehabilitate, strengthen, and expand CUs by improving the capacity of about 21 CUs to provide sustainable financial services; and (c) strengthen the credit union federation (CUF) to provide training and related services to its affiliated CUs.

1 These included 5 branches of Indonesian state banks, 10 regional development banks, and 3 private commercial

banks. Bank Rakyat Indonesia, the government-owned rural banking institution, operated a number of village bank units (Unit Desas), which provided general savings and loan services at village level.

2 ADB. 2000. Grant Assistance to Timor-Leste for Microfinance Development Project. Manila. 3 ADB. 2000. Technical Assistance to Timor-Leste for Strengthening the Microfinance Policy and Legal Framework.

Manila.

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(ii) Rural finance for microenterprises. The component will provide a line of credit to the MFB and CUs for income-generating activities.

(iii) Project management. The component will provide support to the project

management unit (PMU) under the Commerce, Industry and Tourism Division of the Economic Affairs Department through provision of staff, vehicles, equipment, and funds for operational expenditures.

5. The project components included strengthening and rehabilitation, and a $2.50 million credit line to credit unions. However, during implementation, TFET chose to provide only $4.00 million against the estimated $7.72 million, so the Project decided to curtail CU activities and focus on successful establishment and operation of the microfinance bank. The 48% reduction in project funds caused the number of households that would benefit from the Project to decrease proportionately. Since 95% of the $4.00 million grant fund was utilized in MFB development, project outputs are assessed mainly in terms of MFB performance.

II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation

6. The project design is considered relevant and consistent with the three fundamental requirements to establish a sustainable microfinance institution (MFI) in Timor-Leste: (i) Joint Management Arrangements between the World Bank and ADB with regard to TFET;4 (ii) ADB’s strategy in Timor-Leste to help the transitional administration support economic recovery, reduce poverty, and help establish sustainable financial institutions; and (iii) ADB’s microfinance development strategy5 which emphasizes development of the financial system to achieve sustainable results and maximize development impact. Specifically, the microfinance development strategy emphasized an enabling policy environment, financial infrastructure, and development of financial intermediaries. The aim was to provide a variety of financial services—not just credit—in a financially viable and sustainable manner within a reasonable period. Given Timor-Leste’s critical development needs, the Project is considered highly relevant in supporting economic recovery and poverty reduction. 7. The quality of the project preparatory TA report was satisfactory, as the proposed project design was relevant to achieve the objective of addressing Timor Leste’s need to increase rural income through employment opportunities. Project formulation became even more urgent and relevant in view of the total collapse of the banking system. The project design to establish an MFB for providing financial services is generally sound and consistent with the project objectives. However, the proposed design to rehabilitate existing CUs and strengthen CUF in a post-conflict environment was premature because of insurmountable institutional, organizational, and governance problems. Nevertheless, the inclusion of CUs in the project design was considered logical during project formulation, given the vacuum created by the departure of Indonesian banks and the lack of other service providers to quickly provide income-earning opportunities. However, a substantial reduction in project funds caused the PMU, in consultation with project steering committee, to build outreach through MFB to provide support through a wholesale lending product for qualified CUs and nongovernment organizations (NGOs). This resulted in substantial savings, which were later transferred as extra equity to MFB. The MFB is considered more relevant as it deals directly with the community (including

4 ADB. 2000. Joint Management Arrangements for the Trust Fund for East Timor. Manila. 5 ADB. 2000. Finance for the Poor: Microfinance Development Strategy. Manila.

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members of the CUs) and is more appropriate in a relatively small and thin market such as Timor-Leste. In this context, the project design and formulation to establish an institution such as MFB—to achieve the project goal of providing financial services to the poor—was logical and sound. The strategy to provide sustainable financial services rather than quick-disbursing financial grants, used by many NGOs, was highly appropriate. B. Project Outputs 8. The Project began operations in one of the most difficult environments for microfinance development and faced enormous implementation challenges. There was virtually no institutional infrastructure (including financial sector policies) and many agencies were giving grants for livelihood activities. It was even a challenge to locate a suitable building to establish project operations. Based on the reduction in TFET project funds, the Project decided to focus on establishing a sustainable MFB rather than spreading the funds thinly over other activities. In this context, the Project has substantially achieved appraisal expectations. A comparison of the Project’s targets at appraisal and actual achievements is in Appendix 1. 9. Institutional Building and Strengthening. This component assisted the establishment of a financially sustainable MFB to provide financial services to the poor (including women). The aim was to promote economic development through community building and social mobilization. It was also envisaged that the MFB would be a depository bank to the CUs. The Project, supported by the TA (footnote 3), created the necessary policy and legislation to establish an MFI. It was promulgated in December 2000,6 and the Foundation for Poverty Reduction in East Timor (the Foundation)—the interim owner of the Instituicao de Microfinancas de Timor-Leste (IMFTL)—and the first MFB were created. IMFTL began as a regulated, quasi-banking institution in May 2002. The initial paid-up capital for IMFTL was $2 million, as required by the Banking and Payments Authority (BPA), which acts as the central bank. The Foundation created a Board of Trustees—comprising government representatives, donors, and the private sector—to supervise IMFTL operations. IMFTL, through its Board of Directors, manages day-to-day affairs and operations. 10. The Project envisaged the quick establishment of several MFB branches. However, the quasi-bank license limited branch development as BPA imposed a $1.0 million ceiling on deposit mobilization. As a result, IMFTL operated with only three branches in 4 out of the 13 proposed districts. Nevertheless, since its establishment in May 2002, IMFTL has experienced rapid growth in business, especially in mobilizing savings and small lending. At the project completion review,7 the number of active borrowers from IMFTL grew four times (from 854 to 4,054) and the corresponding amounts grew 28 times (from $0.06 million to $1.7 million). Active depositors multiplied five times (from 1,987 to 11,153) and deposits grew three times (from $0.38 million to $0.99 million). Average deposit size is $90 and the current interest on deposits is 0.5% per annum. This rate is competitive with commercial bank and NGO rates in Timor-Leste. Total assets have grown 1.5 times from $2.2 million in 2002 to $3.6 million in 2005. However, these growth rates—impressive as they are—do not quite correspond to the project estimates of the proposed MFB operations. Project estimates, in hindsight, appear to have been overly optimistic for Timor-Leste’s post-conflict setting (including difficult terrain), limited scope of operation (due to the deposit ceiling), and deficient staff capacity, among other factors. Considering the difficult operating environment and the problems it has encountered, IMFTL has been successful in providing much-needed microfinance services to the Timorese.

6 Executive Orders No. 2001/7 and 2001/8, issued by UNTAET with the endorsement of the Council of Ministers. 7 Year 3 of project operation would be up to 30 June 2005 as operation started late May 2002.

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11. The Project also provided capacity building assistance until early 2003 to rehabilitate and strengthen the 21 CUs to increase outreach. By then, 17 CUs were beyond rehabilitation and only 4 achieved a satisfactory operational level. Independent verification8 of the CUs listed by the CUF indicated that only 3–5 CUs are potentially viable; others have less than 50 members each and are too small to be viable.9 During project implementation, it was found that the existing CUs and CUF have very low absorptive capacity for external credit and assistance. Most of the CUs could not be rehabilitated due to political disputes, staff and resource constraints, lack of records, and distrust among members. Initially, the Project provided training to CU management to strengthen operations. It also faced severe problems in strengthening the CUF because of weak management and governance problems. Nevertheless, the Project undertook serious attempts to strengthen the CUF and provided operating subsidies, as well as technical and logistical support. Despite initial project support, CUF and CU management remains weak. In early 2003, when TFET indicated that the remaining estimated project funds of $3.72 million would not be available, the project steering committee decided that (i) a separate line of credit would not be established for CUs, and (ii) qualified CUs could apply for wholesale loans through IMFTL for relending to members, subject to meeting IMFTL’s lending criteria.

12. Rural Finance for Microenterprises. At appraisal, it was proposed that an MFB and rehabilitated CUs would provide small loans to poor households for income-generating activities. A $6.00 million credit line was envisaged—$2.50 million for CUs and $3.50 million for IMFTL for lending. However, as a result of donors’ fund constraints, TFET gave the Project only $4.00 million compared with the original estimate of $7.72 million. To accelerate lending, IMFTL undertook a wide range of training activities and workshops covering microfinance principles, loan products and evaluation, group formation, and meeting outreach targets. Most of the loans were made for short-term investments in agricultural and agroprocessing, and market vending. The average loan size was about $300 per borrower. Currently, IMFTL charges a flat interest rate of 18% per annum plus a 5% front-end fee on loans, which translates to about 31% effective rate due to the weekly and biweekly repayment terms. This is competitive compared with other MFIs in Timor-Leste. 13. Small payroll loans were also provided to low-salaried civil servants (earning between $80 and $120 per month) for rebuilding and repairing their houses, and supporting children’s educational expenses. It should be noted that loans made to civil servants were not at the expense of other borrowers; rather, they served an unmet demand as there were no other service providers (including commercial banks) serving their immediate needs. IMFTL’s non-payroll loans increased by 47% (1,538–2,262) from July 2003 to June 2005 while payroll loans grew by only 25% (1,428–1,792). All efforts are in place to further increase non-payroll lending and deepen its poverty outreach. IMFTL must be operationally self-sufficient and payroll loans provided about 65% of IMFTL’s operating revenue in the early phase of operations, which is relevant in a very thin market and a young MFI. As the operation expands to more rural areas with more branches, IMFTL will increase outreach to rural clients. 14. The loan recovery rate reached 88% (30 June 2005) compared with 84% (end of 2004). It is important to improve the recovery rate through a better-quality loan portfolio and IMFTL has taken steps to address this issue. The operating self-sufficiency ratio has also improved and there are indications that IMFTL will start to realize a small profit by the end of 2005. Since

8 The verification was conducted by the Asian Confederation of Credit Unions, Bangkok, Thailand in November 2002. 9 Sustainable credit unions need at least 250 members to generate benefits for members.

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IMFTL is the only licensed MFB, its lending continues to be significant, catering to the needs of rural households in Timor-Leste. 15. Project Management. The PMU supported project implementation and helped implement the TAs. The project manager (a microbanker) headed the PMU and a small team of local Timorese provided good management support in project implementation, including establishment of the IMFTL. The PMU coordinated well with all stakeholders, including CUs, CUF, NGOs, development partners, and the Government. Project management was effective and resulted in substantial operational savings, which were later transferred to IMFTL as additional capital. Considering the very difficult operating environment for the Project, the PMU managed to achieve its objective—particularly in establishing a viable MFB on time—which has earned credibility and trust among the Timorese. C. Project Costs 16. At appraisal, the total project cost was estimated at $7.72 million; however, at completion, only $4.00 million (52%) was made available because of TFET fund constraints. As a result, the Project decided to focus on establishing the MFB (IMFTL) rather than trying to spread the limited funds thinly rehabilitating CUs. The $4.00 million grant was generally adequate to meet the project objective of establishing and operating IMFTL. At closing, as a result of efficient management and supervision, the Project realized savings and the remaining unutilized amount of $0.85 million was used as additional capital for IMFTL, as stipulated in the Grant Agreement. Overall, the funds were efficiently managed and ADB closely monitored project operations. Details of project costs are in the Basic Data tables. D. Disbursement and Procurement 17. As agreed with TFET, all disbursements were made pursuant to ADB’s Loan Disbursement Handbook. Immediately after project approval, an imprest account fund for $0.77 million was established. However, due to lack of banking facilities in Timor-Leste, the funds were not received in Dili until three months later by the PMU. ADB’s direct payment and imprest fund procedure was used in disbursement of eligible expenditures for goods and services. ADB’s statement of expenditure was used in the replenishment/liquidation of the imprest account. Initially, as a result of the post-conflict situation, most goods required by the Project (vehicles, office equipment and supplies, and furniture and fixtures) were procured through international shopping. However, at a later stage of project implementation, small purchases were undertaken locally. The imprest fund was operated and maintained in accordance with ADB’s Guidelines on Imprest Fund and Statement of Expenditure Procedures. Although there were some initial delays in setting up various disbursement procedures which were acceptable to UNTAET, disbursements and replenishments generally proceeded on time. The imprest fund procedures were very effective and had a positive impact in ensuring timely fund utilization. Annual audits by auditors acceptable to ADB were undertaken in accordance with sound auditing standards.

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E. Project Schedule

18. The Project was to be implemented over 3 years from the date the grant agreement became effective (December 2000), which is when it was signed.10 There were no significant delays in project implementation, although the Project was extended for another year to oversee IMFTL operations. There was an initial delay of 5 months in fielding project staff, because of delays in establishing the imprest fund, but it did not affect overall project implementation. The main difficulties encountered related to identifying project beneficiaries, which was complicated by large displaced communities. The Project managed to meet most of its planned project activities on schedule. Support to CUs and CUF was discontinued due to governance issues (para. 5), all remaining related scheduled activities for these components were terminated, and the Project devoted its activities to IMFTL. Work at IMFTL was temporarily hampered, though not seriously, with the physical destruction of the office premises and equipment at the IMFTL head office and the Dili branch during the riots of 4 December 2002.11 This caused the original closing date of 31 December 2003 to be extended by 12 months to 31 December 2004. Actual implementation covered a total of 46 months (March 2001–December 2004). Detailed actual implementation activities are in Appendix 2. F. Implementation Arrangements 19. At appraisal, the Commerce, Industry and Tourism Division (CITD) of the Economic Affairs Department was designated as the Executing Agency (EA) under the UNTAET.12 After Timor-Leste’s independence in May 2002, the Ministry of Economic Development was designated as the EA. Administrative changes in the newly independent Government generally did not affect project implementation arrangements. A project coordination committee (PCC) was established and effectively guided and coordinated project implementation. It was chaired by the cabinet member of the Economic Affairs Department (who eventually became the Prime Minister), and the PCC had wide stakeholder representation. The PMU, in consultation with the PCC, took several timely policy actions, which enabled the Project to be implemented and completed on time. The PCC was effective in such key decisions, helped resolve early operational issues, provided policy guidance, and helped establish linkages between various MFIs and other relevant agencies. Considering the difficult environment in which the Project was implemented, all stakeholders provided good coordination support to deliver project outputs and achieve project purpose. Overall, there were no major changes required and the implementation arrangements were appropriate and effective. G. Conditions and Covenants

20. Generally, compliance to covenants has been highly satisfactory. The covenant related to onlending to CUs was not complied with, mainly because of unrealistic assumptions during project preparation about CUs’ ability to onlend to members. As a result, the Project did not

10 Grant No. 8186-TF ETM between UNTAET as (original) recipient and ADB, acting as joint implementing agency of TFET and representative of the International Development Association (IDA), acting as trustee of the TFET, was signed and became effective on December 2000.

11 The back-up system—particularly for operations, finance, and accounting—and relevant data were immediately restored. Temporary operations were carried out at the BPA and later at a rented commercial space. The IMFTL office was reestablished in November 2003.

12 As the transitional Government evolved, there were changes in the names of government ministries, departments, and divisions.

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proceed with setting up an independent revolving fund but instead agreed to use IMFTL’s onlending facilities to CUs. The reporting and auditing of project account covenants were fully complied with (Appendix 3).

H. Related Technical Assistance 21. An advisory TA of $250,000 for strengthening the microfinance policy and legal framework (footnote 3), financed by ADB on a grant basis from the Japan Special Fund, was approved with the grant. The TA’s objective was to help the transitional administration develop policies and legal frameworks for the establishment of microfinance operations in Timor-Leste. The scope included preparation of policies and regulations, specifically (i) policies on ownership and establishment of an MFB; (ii) MFB policies on licensing and capital requirements; (iii) legislation enabling MFBs to provide full financial services; and (iv) legislation to facilitate the formation and operation of CUs and cooperatives. 22. Three international consultants assisted TA implementation for 14 person-months. The consultants reviewed existing banking regulations and drafted (i) policies for the establishment of an MFB (including bylaws for incorporation, ownership, licensing, and minimum capital requirements); (ii) documents required to create a foundation to act as the initial MFB owner; (iii) broad policies and regulations for effective microfinance operations; and (iv) regulations for CU operations. As a result of the TA, the founding documents and statutes of the Foundation and IMFTL were approved with the promulgation of two executive orders (footnote 6) in December 2001. IMFTL was established in early 2002 and BPA issued a preliminary operating license on 22 May 2002. The TA was rated successful and the TA Completion Report was circulated in December 2003 (Appendix 4). 23. In addition to the advisory TA, ADB also provided a small scale TA13 for $150,000, which supported the installation and adoption of the UN/FAO-GTZ micro-banking system (MBWin) as the core banking software for IMFTL operations. A file back-up system (off-site) was installed, which proved effective during the riots in December 2002—computers and files in the Dili head office were destroyed but the files were quickly retrieved due to the back-up system. The software is now operating successfully in IMFTL. The TA was successful and supported the Project in achieving its objectives. I. Consultant Recruitment and Procurement

24. Selection and engagement of international and domestic consultants were carried out according to ADB’s Guidelines on the Use of Consultants. Generally, no major difficulties were encountered in procuring the services of international consultants. However, there were some difficulties in recruiting domestic consultants because of lack of qualified local Timorese. Consultants generally demanded higher than usual remuneration because of the fluid political situation. The Project was able to recruit and mobilize the consultants within the project implementation period, although some timing and duration adjustments were needed for certain consultants to meet project needs. The Project had provision for a total of 47 person-months of international and 180 person-months of domestic consulting services—covering project management, microfinance, finance, management information systems, human resource development, and monitoring and evaluation. However, the Project utilized 69 person-months of international and 80 person-months of domestic consultants because of the lack of qualified domestic consultants and the necessity to meet realistic project implementation needs. There 13 ADB. 2001. Technical Assistance to Timor-Leste for Microfinance Information Technology System. Manila.

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were no major problems with packaging contracts, tendering, and evaluation of bids, despite some delays in receiving government approvals due to unfamiliarity with ADB’s procurement guidelines and procedures. The Project was able to provide significant skills transfer to Timorese in various government departments on consultant recruitment and procurement procedures. J. Performance of Consultants, Contractors, and Suppliers 25. The international consultants’ performance was generally satisfactory, except for the international finance/management information systems specialist who was not fully qualified and whose contract was pre-terminated after serving for 2 months out of the contracted 5 months. Most of the domestic consultants were incapable of fulfilling their terms of reference and their contracts were also pre-terminated. The working relationship with counterparts and Timorese staff in government departments were good and the consultants managed to impart technical skills in various areas. However, the language barrier complicated timely implementation and significant time was spent on interpretation and translation of various documents (including training materials) into Tetum, Bahasa Indonesian, and Portuguese.14 Small contractors were engaged in the establishment of PMU and IMFTL’s offices. Most of the local contractors completed their work with little delay and the quality of work was generally satisfactory. Generally, there were no major problems encountered with contractors or suppliers. K. Performance of the Grant Recipient and the Executing Agency

26. The performance of the grant recipient (the Government) and the EA has been satisfactory. The EA’s performance in executing and guiding project implementation has been commendable, particularly in the context of the adverse post-conflict environment. The EA generally complied with the covenants in the Grant Agreement. Compliance with grant covenants—including submission of progress reports and audited financial statements, and regular PCC meetings—was satisfactory. The PMU, in collaboration with the EA and development partners, was able to utilize the total grant of $4.0 million efficiently and effectively. The EA demonstrated its commitment, in particular the PMU, in working tirelessly for successful project implementation. As a result of the EA’s and PMU’s good performance, the Project was able to create the Foundation and IMFTL, and managed to secure a banking license to make IMFTL operational on time. The Government, TFET donors, and other stakeholders have commended the timely establishment and performance of IMFTL. The project financial statements were audited annually by an international auditing firm, and in all cases, the auditors expressed an unqualified opinion on the financial statements. The last audit report for the year ending 30 June 2004 has been submitted to ADB. L. Performance of the Asian Development Bank 27. As the country was newly independent and lacks experience in dealing with external organizations, ADB was more closely involved in project implementation than usual. ADB identified initial segments for support and acted quickly to meet them. Aside from the recorded review missions, ADB—through the Special Office in Timor-Leste—frequently liaised with the EA and the PMU. As joint trustee of the TFET, ADB provided close support in ensuring timely implementation of the Project. In addition, ADB provided two TAs to develop the policy and legal framework for microfinance operations, and for the installation and adoption of the UN/FAO-GTZ microbanking system (MBWin) [footnotes 3 and 13]. The number of missions was 14 The official languages of Timor-Leste are Tetum and Portuguese.

9

adequate and necessary advice was provided promptly. The project design was appropriate in providing the necessary intervention to support poverty reduction in Timor-Leste. ADB’s performance is rated highly satisfactory.

III. EVALUATION OF PERFORMANCE A. Relevance 28. The Project is consistent with the Government’s policy of poverty reduction and rebuilding the country. When TFET confirmed the reduction in project funds to $4 million in early 2003, the Project decided to focus on strengthening IMFTL operations and supporting CUs through IMFTL’s wholesale lending facilities rather than establishing a separate line of credit outside IMFTL operations. The reduction in project funds has affected the total beneficiaries but the design was generally relevant. By providing financial services and promoting rural income-generating activities, the Project—through IMFTL—contributed significantly to the establishment of new microenterprises and the expansion of existing businesses. Its success in reaching the envisaged number of borrowers with a lower-than-expected project grant has provided an opportunity for Timorese to improve their livelihoods. The Project has laid a strong foundation for poor and low-income households to take advantage of economic opportunities to rebuild their assets and reduce their vulnerability to internal and external shocks, which had adversely affected their living standards. Through IMFTL, the Project led the effort to restore microfinance services in rural and urban areas, and helped in Timor-Leste’s economic recovery. IMFTL’s loan products (including small business loans) are helping to rebuild destroyed livelihoods, promote income-generating activities, and make a positive contribution to poverty reduction. Overall, the Project is assessed as relevant in the context of Timor-Leste.

B. Efficacy in Achievement of Purpose 29. The Project is efficacious in the achievement of purpose through IMFTL, but inefficacious through CUs because of the reduction in project funds and institutional weaknesses. At the project completion review, during focus group discussions and assessment, beneficiaries expressed their appreciation of the Project, which helped them access microfinance services from IMFTL, particularly small loan and deposit facilities. Based on the PCR Mission’s assessment, the average annual household income of IMFTL borrowers was estimated at about $336, which translates into $67 annual per capita income (based on five family members per household). This represents an increase of 22% over the baseline amount of $55 in the project framework, during 30 months of project implementation. Empirical evidence shows that about 75% of borrowers used their loans to start a small business (kiosks, market stalls, stores, and small-scale coffee and vegetable growing) or expand existing businesses, and incremental income was saved or re-invested to support children’s education and household expenses. 30. The social impacts on beneficiaries were significant, particularly in terms of reduced borrowing from moneylenders and middlemen, improved credit literacy, empowerment through increased participation in community lending decisions, and recovery of loans. Overall, the Project is assessed as less efficacious because the CU component was not achieved as originally planned. In the longer term, IMFTL will contribute significantly to realize the development goal of reducing rural poverty. Appendix 5 summarizes the results of the Project’s socioeconomic impact assessment.

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C. Efficiency in Achievement of Outputs and Purpose 5. The Project was implemented efficiently. The Project’s purpose and, in particular, the outputs—in terms of quantifiable benefits proportionate to funds provided—have been substantially achieved through rapid growth in business. IMFTL has become a reasonably efficient conduit for delivering much-needed microfinance services in Timor-Leste, as evidenced by the rising number of loans disbursed and deposits generated, both in amount and number of clients. Its presence in the 4 districts and 19 subdistricts through three branches has increased access to financial services for many poor and low-income households. The Project supported IMFTL’s local staff with hands-on training in microfinance delivery and IMFTL is fully managed by the Timorese. To improve service delivery in Dili, Gleno, and Maliana branches, IMFTL has established group meeting centers, currently 79, and growing. These centers are located in the subdistricts and comprise 467 groups with a total of 2,332 individual members. The groups regularly meet in their respective centers to conduct orientation and training for clients, and discuss issues regarding loans and microprojects. IMFTL’s achievements—particularly loans disbursed and deposits generated, and the outreach achieved during only 30 months—is remarkable. The financial ratios have also shown impressive improvements from 2002 to 2005, and the results are better than envisaged at appraisal. At project completion, the estimated economic internal rate of return of sample microenterprises indicates the viability of such small businesses (Appendix 6). Overall, the Project is assessed as efficient. D. Preliminary Assessment of Sustainability

6. Strengthened corporate governance, improving local staff capacity, stronger operational and financial performance, focused client orientation, and a long-term business and strategic plan for divestment are key elements of IMFTL’s growing sustainability. IMFTL has established a satisfactory monitoring and evaluation system (including an internal control mechanism) but will need further strengthening of the regular audit and impact assessment of borrowers. Given the limited number of qualified local staff, on-the-job training to upgrade their skills has been and will be the focus to improve performance and increase confidence. Continued nurturing of IMFTL’s board members’ leadership and commitment to guide IMFTL operations is ongoing and essential for sustainability. Efforts are in place for IMFTL staff and board members to build close working relationships with the Government, private sector, development partners, and NGOs to further strengthen IMFTL and overall microfinance development in Timor-Leste. 7. In terms of operational and financial performance, the focus is now on self-sufficiency, ensuring a positive operational margin for loan products, reducing portfolio at risk, and increasing staff productivity. Operating self-sufficiency stood at 118% (30 June 2005) compared with 79% (end of 2004) while financial self-sufficiency was 74.3% (30 June 2005) against 67.5% (end of 2004). More efforts and focus on improving the loan products and service mix are being implemented. The current business plans are being revised and an action plan has been approved by the IMFTL board for strengthening IMFTL’s operations and sustainability. In terms of long-term sustainability, IMFTL ownership needs to be diversified to infuse international best practices and professional management. IMFTL trustees are considering various options. The divestment strategy will include shareholder selection (possibly local private sector and international strategic institutional investors) and a share transfer mechanism. 8. IMFTL’s growing profitability during its first 30 months of operation indicates a positive trend towards operational and financial sustainability. To provide guidance and help ensure

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IMFTL’s sustainability, the Project undertook four studies in 2003/04: (i) divestment strategy,15 (ii) rating assessment,16 (iii) financial audit,17 and (iv) Consultative Group to Assist the Poor (CGAP) assessment of IMFTL. The overall assessments of these studies indicate that IMFTL’s operation is sound but there is a need to strengthen local staff capacity for sustainable operation. As a result of the assessments, in April 2005, CGAP selected IMFTL as one of the five best microfinance institutions in the Asia and Pacific region for financial transparency and governance. 9. IMFTL’s rapidly increasing lending volume, potential to tap underserved or unserved savers, and growing profitability are positive indications of its growing sustainability. In view of this, obtaining a full banking license and divestment of ownership are steps in the right direction. Recent government macroeconomic actions—ultimately aimed at promoting private sector investment and job creation—would favorably impact on IMFTL and further support its sustainability. IMFTL is considered sustainable provided that the ongoing effort to secure a full banking license and transformation of IMFTL into a completely independent financial institution continues, and the Foundation takes appropriate plans and actions early. Overall, the Project is assessed as likely to be sustainable. Details of IMFTL’s performance are in Appendix 7. E. Institutional Development and Other Impacts 10. IMFTL has improved its systems and procedures, and strengthened its financial position and staff capacities as a result of close interaction with various stakeholders, particularly ADB. However, it is evident that there is further room for improvement, especially in its institutional (including local staff) capacity. 11. The focus group meetings18 held by the project completion mission with clients (including borrowers) found that the Project has created other impacts. For example, the credit facility provided by IMFTL has had positive impacts on the lives of the rural poor. The beneficiaries have, to a certain degree, learned thrift habits, and increased their social awareness and confidence, especially women. The support to children’s education is noteworthy, considering that 43% of heads of households and 53% of spouses had never gone to school. The exposure to and use of the credit facility improved the general credit literacy of borrowers, most of whom had not previously borrowed from any formal source. 12. The Project also resulted in greater participation of women in financial decisions in borrowers’ households. Apart from financial services, group discussion reveals that the Project has been helping women increase interaction during regular meetings and has contributed to their social development. The Project’s contribution towards institutional development and other impacts is rated moderate, considering the IMFTL has only been in operation for 30 months.

15 Enterprising Solutions Global Consulting, Washington, US, 2003. 16 Micro-Credit Ratings International Ltd., New Delhi, India, 2004. 17 Regular annual financial audits by an international auditing firm from FY2002 to FY2004. 18 The meetings were held in group meeting centers in the Dili and Gleno branches. A total of 47 participants

attended the meetings, who answered written questionnaires in Bahasa Indonesian. Those who can neither read nor write were assisted by IMFTL staff in answering the questionnaires. It should be noted that data gathered from these focus group meetings can only be considered anecdotal information.

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IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment 13. As a result of a significant reduction in project funds from TFET donors, the Project could not be implemented as anticipated and project scope was reduced with regard to rehabilitation and a credit line for CUs, which constituted about 48% of the estimated project cost. As a result, the project goal of reaching about 20,000 households has been reduced proportionately. Nevertheless, with the available $4 million, the Project did a commendable job in (i) establishing sustainable MFB (IMFTL) operations, (ii) creating the required microfinance policies and regulatory framework, and (iii) establishing an effective microfinance information technology system. The Project also developed income-generating skills of the poor, especially women, and raised their social awareness and confidence. 40. The project intervention was very timely and decisive. Currently, IMFTL’s outreach target is in line with its business plan and is expected to produce consistent growth and profit in the medium to long term. It is important to note that IMFTL is a young institution that operates in one of the most difficult environments for microfinance development and has had to confront various problems during its 30 months of operation. Nevertheless, it has been generally successful and has established credibility within the community as the first “Timorese bank”. IMFTL operations will require continued development of the scale and quality of services. This is currently being initiated by the IMFTL board and management. Further, ADB is continuing its TA19 support to improve IMFTL’s sustainability (including human resources) and extend its outreach to cover more districts to serve the poor. The overall assessment of achieving the project objectives under the reduced project scope is rated successful. However, in accordance with ADB’s rating system, the Project as a whole is rated partly successful (see Appendix 8). B. Lessons Learned 41. The major lessons learned from the Project are the following:

(i) In post-conflict countries such as Timor-Leste, microfinance is an effective development tool for poverty reduction. It enables poor and conflict-affected communities to improve economic security quickly. The capacity of poor households to borrow and save should not be underestimated, even in the most difficult environments.

(ii) An appropriate policy, legal, and regulatory framework should be in place before sustainable MFB operations can begin. In post-conflict countries, developing financial infrastructure and viable local institutions takes much longer than in normal situations.

(iii) Establishing a regulated MFB through grants is a sound strategy. However, it is important to have a very clear road map for an ownership structure from the start. Further, the local staff and institutional capacity should not be overestimated because, in the case of Timor-Leste, a large number of qualified Timorese left the country because of civil unrest and the Project and the country faced a severe shortage of skilled labor in all sectors, including microfinance.

(iv) To establish a successful microfinance bank, it is essential to recruit a qualified practical banker (rather than a general microfinance specialist) with extensive

19 ADB. 2004. Technical Assistance to Timor-Leste for Strengthening Microfinance Operations. Manila.

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field experience in managing similar banks. In the case of IMFTL, it is one of the success factors.

(v) A considerable amount of TA is needed over an extended period to build a strong and sustainable MFB in a post-conflict situation similar to Timor-Leste.

C. Recommendations 42. The following recommendations are aimed at improving the long-term viability of IMFTL and its impact on rural households and microenterprise development in Timor-Leste:

(i) Project Related (a) Develop a comprehensive human resources development strategy to

upgrade local staff skills to strengthen IMFTL operations and sustainability. The IMFTL board and senior management should pay particular attention to microfinance operations and management (including credit delivery and collection) to reduce the delinquency ratio.

(b) Apply for a full banking license to expand outreach to more districts (possible branches in Aileu, Baucau, and Oecussi) and lift current restrictions on deposit caps. The Board, with the trustees’ approval, should submit an application to BPA immediately.

(c) Proceed with implementation of the IMFTL divestment plan to seek socially responsible investors for a possible equity investment. The trustees should take the lead in consultation with key stakeholders.

(d) Review the wholesale lending criteria to CUs and NGOs for onlending to its members to accelerate credit delivery and increase outreach.

(e) Strengthen the internal audit and control system, and audit function at head office (in Dili) and the branches for effective operational audits.

(ii) General

(a) Ensure continuing long-term support to microfinance development from development partners to lift Timorese out of poverty—particularly to make sure poor households can access a broader range of services at village level. IMFTL’s impressive results have generated wide interest in microfinance in Timor-Leste to improve poor and low-income households’ economic opportunities.

(b) Ensure regular data backup off-site for countries emerging from civil unrest and fragile government with burgeoning financial institutions such as IMFTL to safeguard client records and other vital financial information in the event of sudden riots, which could cause enormous problems to the microfinance managers. During the 2002 riots in Timor-Leste, the IMFTL office was looted and financial records and equipment (including computers) were destroyed. However, IMFTL had a back-up system which helped to immediately restore operations and gained the confidence of clients and other stakeholders.

Appendix 1 14

EXPECTED AND ACTUAL OUTPUTS

Performance Indicators/Targets Actual Outputs A. Sectoral Goal 1. Reduce rural poverty

• Move about 20,000 of Timor-Leste’s 78,000 poor households (26%) above the poverty line.

2. Develop a sustainable rural microfinance system more responsive to the needs of the rural poor, including women.

• Improve the performance of the microfinance system with improved focus on policies and strategies.

B. Objectives 1. Increase rural incomes through employment

opportunities and improve the quality of life of the beneficiaries. • Increase beneficiaries’ annual per capita

income from $55 to about $80 by the end of the Project.

2. Create sustainable microfinance institutions to

help reduce poverty by providing access to financial services for the poor. (i) Establish microfinance bank to provide

access to financial services, and (ii) Strengthen credit unions (CUs) to provide

microfinance services to members. 3. Sustainable policies and regulatory framework

(i) Pass legislation for sustainable rural financial institutions.

The Project has contributed to poverty reduction. About 14,500 poor households have benefited from the Project. The Project developed a sustainable microfinance institution and strengthened the microfinance system in Timor-Leste. As of 31 December 2004, beneficiaries’ annual per capita income increased from $55 to about $67, short of the target of $80, but nevertheless an improvement. This increase is not solely attributable to the Project, as the borrowers had other economic activities and had also benefited from the numerous grants and donations that flowed into the country during the post-conflict period. However, it is estimated that about 60% of the increase in income can be attributed to the Project. Through the establishment of the Instituicao de Microfinancas de Timor-Leste (IMFTL), the Project has significantly contributed to strengthening the microfinance sector. IMFTL has provided 14,500 loans and deposit services to over 11,000 depositors. Without IMFTL, most of this clientele may not have been able to obtain the services. IMFTL has been in operation since May 2002, with head office in Dili and three branches in Dili, Gleno, and Maliana. It plans to gradually expand its outreach. Institutional capacity building assistance was provided for CUs but further assistance was suspended in March 2003 because of the (i) reduction in grant fund from $7.72 million to $4.0 million; (ii) governance problems in CUs and the credit union federation (CUF); and (iii) small number of CU members made operations unviable. Executive Order No. 2001/8 issued by the United Nations Transitional Administration in East Timor (UNTAET) in December 2001 is the legal basis for establishing IMFTL.

Appendix 1 15

Performance Indicators/Targets Actual Outputs C. Project Components 1. TFET provides institution building and strengthens capitalization of the microfinance bank.

(i) (a) Establish a financially and organizationally sustainable

microfinance bank; (b) establish a fully operational microfinance bank; and (c) procure equipment and vehicles.

(ii) Rehabilitate and strengthen credit unions

to provide microfinance services; improve capacities of the 21 participating credit unions so they are able to provide profitable and sustainable financial services.

(iii) Strengthen CUF to respond to members’

needs; enable sustainable and viable CUF to provide (to its 21 credit union members) responsive services such as training, resource mobilization, and related functions.

2. Provide rural finance for productive

microenterprises or income-generating activities.

(i) Provide $3.5 million to establish the microfinance bank.

(ii) Release about $7.2 million in cumulative loans to about 38,300 microenterprises (cumulative number of loans).

(iii) Generate about $1 million in savings.

(iv) Provide investment, savings, and credit

services. • Release $2.5 million for credit unions

to disburse in loans for

An initial $2.0 million was provided as equity for IMFTL. Prior to project closing, an additional $0.8 million ($0.5 million in December 2004 and $0.3 million in July 2005) was infused as additional equity. IMFTL was formally launched on 20 May 2002. Owned by the Foundation for Poverty Reduction in East Timor (the Foundation), it is now fully operational. Required equipment and vehicles were procured. Numerous train-the-trainer sessions were conducted for CU trainers from 2001 to 2002. Field level practical CU staff training was conducted to upgrade capacities. Twelve Timorese CU trainers and officers visited credit unions in Darwin, Australia in November 2001. Support for CUs was suspended due to governance problems. The performance of only four CUs was found satisfactory. Office equipment, supplies, computer systems, business forms, and training materials have been provided to CUF. Linkups with regional credit union bodies were established, particularly the Asian Confederation of Credit Unions based in Bangkok, Thailand. Participation of CUF officers in regional credit union conferences was supported. CUF support suspended as their assistance to CU members was not satisfactory.

At project close, IMFTL’s paid-up capital amounted to $2.80 million (all from the grant fund)—less than the target of $3.50 million but more than sufficient to support IMFTL operations.

Cumulative loan disbursements totaled $5.10 million against the target of $7.2 million, reflecting a prudent and conservative lending policy. The cumulative number of loans was 14,500. Outstanding deposits amounted to $0.99 million from 11,153 depositors.

Due to reduced grant amount and CU weaknesses in financial management and inability to handle large amounts of funds, the intended credit line for CUs was not released. All lending operations were

Appendix 1 16

Performance Indicators/Targets Actual Outputs microenterprises.

3. Establish effective project management • Create project management unit (PMU).

D. Activities/Inputs 1. TFET grant

(i) Create imprest account and make funds available to participating institutions ($7.72 million released).

(ii) Provide credit access to the poor.

2. Institution building and strengthening (i) Establish a microfinance bank (technical

assistance [TA] consultancy inputs). (a) Undertake TA for implementation of the

microfinance bank (consultancy inputs).

(b) Register microfinance bank (provision of $3.5 million in equity capital).

(c) Form board of directors (representation on the board from the Government and private sector).

(d) Staff and officers recruited and trained (adequate budget allocation).

(e) Provide facilities, vehicles, and equipment for the Project.

through IMFTL only.

The PMU was formed in early 2001 and project implementation began in June 2001.

Imprest fund of $0.77 million (10% of the original grant amount of $7.72 million) remitted by ADB in February 2001 but not received in the project bank account (Banco Nacional Ultramarino) until May 2001 due to lack of banking facilities in Dili.

IMFTL’s three branches serve clients from 4 of Timor-Leste’s 13 districts.

Support was provided through TA 3556 for Strengthening the Microfinance Policy and Legal Framework, which used three international consultants for a total of 14 person-months from February 2001 to December 2002. The consultants drafted (i) policies to establish a microfinance bank (including bylaws for incorporation, ownership, licensing, and minimum capital requirements); (ii) documents necessary for the creation of a foundation to act as initial owner of the microfinance institution; (iii) broad policies and regulations for effective microfinance operations; and (iv) regulations for CU operations. Based on the consultants’ output, UNTAET issued two executive orders on 1 December 2001: (i) Executive Order No. 2001/7 on the Establishment of the Foundation for Poverty Reduction in East Timor, and (ii) Executive Order No. 2001/8 on the Establishment of the Microfinance Institution.

IMFTL’s license as a regulated quasi-bank financial institution was issued in 2002 by the Banking and Payment Authority (BPA) of Timor-Leste, with initial equity of $2.0 million.

The five members of the IMFTL board of directors are appointed by the Foundation. The board is presently composed of two representatives from the Government, two representatives from the private sector, and one representative from ADB. The general manager of IMFTL acts as board secretary.

About 50 staff have been hired and trained; adequate budget has been provided from IMFTL’s operations.

Vehicles, equipment, and supplies have been provided.

Appendix 1 17

Performance Indicators/Targets Actual Outputs (ii) Strengthen CUF

(a) Strengthen interlending fund capacity (systems developed for monitoring and evaluation of credit unions).

(b) Develop functions on training, auditing, and research and development.

(c) Develop and establish working system (progress reports).

(d) Appoint additional technical staff for CUF

(e) Facilitate training (training of technical staff)

(iii) Rehabilitate and strengthen credit unions

(a) Strengthen savings and credit services (adoption of internationally accepted financial standards).

(b) Provide skills training (training in clustered districts for credit unions).

3. Establish PMU (allocate adequate budget)

4. Group formation and strengthening for credit

union and microfinance bank. (Well trained, capable staff)

(i) Beneficiary mapping (ii) Beneficiary motivation and training

(iii) Regular group meetings

5. Complete the Project by 30 October 2003.

Support to this component was discontinued in late 2002.

Due to CUs’ weakness, this facility was not pursued.

Several consultants provided capacity building support.

The Project established an effective management information system.

Initial support was provided but later suspended.

Regular training was undertaken during project implementation until early 2003.

Support to this component was discontinued in early 2003 due to institutional and operational problems.

Internationally accepted financial reporting standards were adopted by IMFTL.

District level training for CUs was suspended in 2003. PMU was established and functioned effectively. Applicable to IMFTL. Staff had been trained on a regular basis. Market study undertaken before opening branches. Field and loan staff conducted regular client orientation in the field.

Ongoing for group borrowers at established meeting centers.

Extended to 30 December 2004 to close project accounts.

Source: Report on a Project Grant from the Trust Fund for East Timor and a Technical Assistance Grant from the Asian Development Bank to the United Nations Transitional Administration in East Timor for the Microfinance Development Project.

Appendix 1 18

POLICY MATRIX

Date of Completion Policy Issue

Policy Dialogue Target Actual

A. Capitalization of $2 million is required to establish a bank. This policy will inhibit establishment of smaller banks (including microfinance).

Amendment of the banking laws is needed to lower the minimum capital requirement for establishing small rural banks. The United Nations Transitional Administration in East Timor (UNTAET) agreed to review current banking laws to promote establishment of microfinance banks.

Mid-2001 Banking and Payments Authority (BPA) still maintains the $2 million requirement. It is considering revision of the policy, but no date has been set.

B. Current draft laws on nonbank financial institutions (NBFIs) do not differentiate credit unions and other microfinance institutions (MFIs) from NBFIs. This could inhibit MFIs from providing full banking services to their clients.

Enactment of laws/regulations is needed to allow MFIs and credit unions provide full banking services to the poor. UNTAET agreed to review the existing legislation.

Mid-2001 Draft laws have been prepared, but have not yet been enacted.

C. Lack of enabling legislation for credit unions and cooperatives.

A legal framework for credit unions and cooperatives will be developed. UNTAET agreed to draft appropriate legislation.

Mid-2001 Draft laws have been prepared, but have not yet been enacted.

D. Interest rate liberalization: although there is no explicit control on interest charged, pressure seems to be mounting for a lower interest rate for microfinance programs.

UNTAET agreed that sub-borrowers would be charged at market rate and an enabling policy framework should be developed to adhere to the principles of market-oriented interest rates.

Mid-2001 Currently, interest rates on loans and deposits are set by MFIs/nongovernment organizations and credit cooperatives. BPA did not set official policy or regulation on interest rates.

D. Legal impediments to the establishment of local banks, including microfinance banks.

The Asian Development Bank advisory technical assistance (TA) will assist in the refinement of laws, regulations and policies. The TA will identify options for establishing the microfinance bank, considering the constraints on UNTAET to accrue contingent liabilities that may arise from mobilized savings by the proposed microfinance bank.

Mid-2001 Delivered on 1 December 2001 when UNTAET issued Executive Order No. 2001/7 to establish the Foundation for Poverty Reduction in East Timor (owner of IMFTL).

Source: ADB. 2000. Report on a Project Grant From the Trust Fund for East Timor and a Technical Assistance Grant from the Asian Development Bank to the United Nations Transitional Administration in East Timor for the Microfinance Development Project. Manila.

Appendix 2 19

PROJECT IMPLEMENTATION SCHEDULE

Component 2001 2002 2003 2004 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

A. Institutional Building/Strengthening

1. Establish a Sustainable Microfinance Bank

a. Prepare appropriate policy and legal framework

b. Acquire banking license

c. Provide equity to MFB

d. Start operations 2. Rehabilitate Credit Unions

a. Undertake field survey for rehabilitation

b. Short-list CUs for assistance

c. Provide operational support

d. Provide necessary training 3. Strengthen Credit Union Federation

a. Evaluate CUF capability

b. Provide operational support

c. Provide training for trainers

d. Provide revolving fund for CU lending B. Rural Finance for Income Generating Activities

a. Provide loans through MFB

b. Provide revolving fund for CUF C. Project Management

a. Establish PMU

b. Field consultants

c. Undertake benefit monitoring CU = credit union, CUF = credit union federation, MFB = microfinance bank, PMU = project management unit. Legend:

Planned Actual

Not Implemented Source: ADB. 2000. Report on a Project Grant From the Trust Fund of East Timor and a Technical Assistance Grant from the Asian Development Bank to the United Nations Transitional Administration in East Timor for the Microfinance Development Project. Manila.

Appendix 3 20

STATUS OF COMPLIANCE WITH GRANT COVENANTS

Condition/Covenant

Status of Compliance

Article II – The TFET Grant Section 2.02 (b) The Recipient may, for purposes of the Project, open and maintain in Dollars a special deposit account (the “Special Account”) in a commercial bank acceptable to Asian Development Bank (ADB), on terms and conditions satisfactory to ADB, including appropriate protection against set-off, seizure and attachment. Deposits into, and payments out of, the Special Account shall be made in accordance with the provisions of Schedule 6 to this Agreement.

Complied with.

Article III – Execution of the Project Section 3.01 (a) The Recipient declares its commitment to the overall strategic goal of the Project as set forth in Schedule 2 to this Agreement and, to this end, shall carry out the Project through the Project Management Unit (PMU) with due diligence and efficiency and in conformity with appropriate microfinance, administrative, environmental, and social practices, and shall provide promptly as needed, the funds, facilities, services and other resources required for the Project.

Complied with.

Section 3.01 (b) Without limitation upon the provisions of paragraph (a) of this Section and except as the Recipient and ADB shall otherwise agree, the Recipient shall cause the Project to be carried out in accordance with the implementational arrangements set forth in Schedule 4 to this Agreement.

Complied with.

Section 3.02 Except as ADB shall otherwise agree, procurement of the goods, works and consultants’ services required for the Project and to be financed out of the proceeds of the Grant shall be governed by the provisions of Schedule 3 to this Agreement.

Complied with.

Article IV – Financial Conditions Section 4.01 (a) The Recipient shall maintain, or cause to be maintained records and accounts adequate to reflect in accordance with sound accounting practices the operations, resources and expenditures in respect of the Project of the departments or agencies of the Recipient responsible for carrying out the Project or any part thereof.

Complied with.

Section 4.01 (b) The Recipient shall: (i) have the records and accounts referred to in paragraph (a) of this Section including those for the Special Account for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to ADB; (ii) furnish to ADB as soon as available, but in any case not later than six months after the end of each such year, the report of such audit by said auditors, of such scope and in such detail as ADB shall have reasonably requested; and (iii) furnish to ADB such other information concerning said records and accounts and the audit thereof as ADB shall from time to time reasonably request.

Complied with.

Appendix 3 21

Condition/Covenant

Status of Compliance

Section 4.01 (c) For all expenditures with respect to which withdrawals from the Grant Account were made on the basis of statements of expenditure, the Recipient shall: (i) maintain or cause to be maintained, in accordance with paragraph (a) of this Section, records and accounts reflecting such expenditures; (ii) retain, until at least one year after ADB has received the audit report for the fiscal year in which the last withdrawal from the Grant Account was made, all records (contracts, orders, invoices, bills, receipts and other documents) evidencing such expenditures; (iii) enable ADB’s representatives to examine such records as ADB shall from time to time reasonably request; and (iv) ensure that such records and accounts are included in the annual audit referred to in paragraph (b) of this Section and that the report of such audit contains a separate opinion by said auditors as to whether the statements of expenditure submitted during such fiscal year, together with the procedures and internal controls involved in their preparation, can be relied upon to support the related withdrawals.

Complied with.

Schedule 3 – Procurement; Consultancy Services A. Procurement 1. Except as ADB may otherwise agree, the procedures referred to in paragraph 2−5 below shall apply in the procurement of goods and services to be financed out of the proceeds of the Grant. For the purposes of these paragraphs, the term “goods” includes equipment and materials, and the term “services” does not include consulting services. 2. The Recipient may use the proceeds of the Grant only for procurement of goods and services supplied from, and procured in: (i) member countries of ADB, (ii) East Timor, (iii) countries that have entered into a contribution agreement with the Trustee with respect to the Trust Fund for East Timor (TFET), and (iv) countries that are members of any organization that has entered into a contribution agreement with the Trustee with respect to the TFET. 3. Subject to the qualification stated in the preceding paragraph, procurement of goods and works shall be subject to the provisions of the Guidelines for Procurement under Asian Development Bank Loans dated February 1999 (hereinafter called the Guidelines for Procurement), as amended from time to time.

Complied with.

International Shopping 4. (a) Each supply contract for goods or services (other than minor items, which are referred to in paragraph 5 below), shall be awarded on the basis of international shopping as described in Chapter III of the Guidelines for Procurement. (b) Each draft invitation to bid and related bid document shall be submitted to ADB for approval before they are issued. After award, a copy of each contract shall be furnished to the Bank.

Complied with.

Appendix 3 22

Condition/Covenant

Status of Compliance

Direct Purchase 5. (a) Contracts for the supply of certain minor items, which are available from a limited number of qualified local suppliers and are estimated to cost, in aggregate, the equivalent of $50,000 or less, may be procured on the basis of quotations obtained from such suppliers. Prior to such procurement, a list of individual items to be procured, an estimate of their cost, an indication of potential sources of supply and any related documents shall be submitted to the Bank for approval. (b) Each award of contract shall be subject to prior ADB approval. After award, a copy of each contract for such items shall be furnished to the Bank.

B. Consultancy Services 6. (a) The services of consultants shall be used in the carrying out of the Project, particularly with regard to the staffing of the PMU. The expertise of the consultants shall be as follows: International consultants:

- Project manager/microfinance specialist; - Finance/management information system (MIS) specialist; - Training/human resource development specialist; and - Monitoring and evaluation specialist.

Domestic consultants: - Counterpart project manager/microfinance institution (MFI)

general manager; - Monitoring and evaluation specialist; - Training specialists (two); and - Auditor.

(b) The terms of reference of the consultants shall be as prepared by ADB and agreed with the Recipient.

7. Subject to paragraph 8 below, the selection, engagement and services of the consultants shall be subject to the provisions of the Guidelines on the Use of Consultants by Asian Development Bank and Its Borrowers dated October 1998, as amended from time to time, and the following provisions of Section II of this Schedule.

8. The consultants may be nationals of (i) any of the member countries of ADB, (ii) East Timor, (iii) countries that have entered into a contribution agreement with the Trustee with respect to the TFET, or (iv) countries that are members of any organization that has entered into a contribution agreement with the Trustee with respect to the TFET.

9. All consultants shall be selected and engaged by the Recipient in accordance with the following procedures: (a) A shortlist of candidates, details of the evaluation process applied with regard to the candidates, and a brief justification for the selection, together with a draft contract shall be furnished to ADB for approval before the final selection of consultants. (b) Promptly after the contract is signed, ADB shall be furnished with a copy of the signed contract. (c) If any substantial amendment of the contract is proposed after its execution, the proposed changes shall be submitted to ADB for prior approval.

Complied with.

Complied with.

Appendix 3 23

Condition/Covenant

Status of Compliance

Schedule 4 – Project Implementation Project Management Unit 1. The Project Management Unit (PMU), to be established in the CITD, Economic Affairs Department, and headed by the Project manager, shall implement and coordinate all Project activities. The Project manager shall concurrently be responsible for providing management and technical advisory support for the proposed MFI. In addition to the Project manager, the Project Management Unit shall be supported by three international and five domestic consultants (one of whom will be the local general manager-designate of the MFI) and three administrative staff. Project Coordination Committee 2. The Recipient shall organize a Project Coordination Committee (PCC) to coordinate the implementation of the Project. The PCC shall be chaired by the Cabinet Member, Economic Affairs Department, with the Director, CITD, the general manager of the proposed MFI, and the executive director of the Credit Union Federation (CUF). The PCC shall meet quarterly and have the following tasks: (i) review the physical and financial progress of the Project; (ii) identify and resolve operational difficulties; (iii) provide policy guidance to the PMU on administrative and financial matters; and (iv) provide support to establish linkages between the various microfinance institutions and concerned agencies. The Project Manager of the PMU shall be the member secretary of the PCC. Involuntary Resettlement 3. The Recipient through the PMU shall ensure that the ADB’s resettlement guidelines are complied with if and when applicable in the carrying out of the Project. Environmental Considerations 4. In the carrying out of the Project, the Recipient shall comply, and shall cause the credit unions (CUs) and the MFI to comply, with all applicable environmental laws and regulations. Environmental monitoring shall be under the guidance of the PMU. Reporting 5. Without limiting the generality of Section 8.06 of the General Conditions, the Recipient shall cause the PMU to prepare and furnish to ADB quarterly reports on the implementation of the Project, in a format acceptable to ADB. Financial Arrangements 6. The following financing arrangements shall apply: A. General 7. Under the Project all potential beneficiaries shall start with loans of about $50 equivalent. Loans shall normally be for terms from 6 months to 1 year. Repeat loans may be gradually increased, depending upon the performance of the clients as well as their utilization capacity. Following best practices, the clients shall deposit pledged savings and remit their loan payments as prescribed by the CU or the MFI. Women shall be encouraged to borrow.

Complied with. Complied with. Complied with. Complied with. Complied with. Complied with.

Appendix 3 24

Condition/Covenant

Status of Compliance

B. Credit Unions (a) Onlending to CUs

(i) The Recipient shall cause that part of the Grant that is to be onlent to the CUs to be onlent at an interest rate of not less than 1% per annum. The onlending shall be under financing arrangements in form and substance satisfactory to the Recipient and ADB (“the financing arrangements”). (ii) The financing arrangements shall, inter alia, cover: a) the terms of the onlending to the relevant CU, b) appropriate reporting and auditing obligations and maintenance of accounts by the relevant CU, c) a description of the purpose for which such onlending is being made, and d) such other provisions as may be agreed between the Recipient and ADB. (iii) The proceeds of the Grant shall not be used to provide repeat financing to a CU unless the CU in question has disbursed 75% of its immediately preceding financing, and substantially complied with all its obligations under its existing financing arrangements. (iv) ADB may review post facto use of proceeds of financing provided by the Project to CUs under the financing arrangements. If ADB shall determine the use of such financing was not made in accordance with the terms of this Grant Agreement or the purposes of the Project, the Recipient shall, upon notice from ADB given after consultation between the Recipient and ADB, forthwith cause the CU to deposit into the Special Account or refund to the Project an amount equal to the amount of such financing.

(b) Relending by CUs to Subborrowers

(i) The CUs shall relend funds received under the financing arrangements, together with their own funds, to sub-borrowers pursuant to subloan agreements, which shall be in form and substance satisfactory to ADB. (ii) The CUs shall relend to sub-borrowers under terms and conditions, including interest charges that cover all delivery costs including provision for loan losses. (iii) Sub-borrowers shall be required to attend a beneficiary training program.

(c) Revolving Fund

Within 6 months of the Effective Date, the Recipient shall establish a revolving fund to receive principal repayments from CUs for the purpose of recycling such repayments to be onlent to CUs for relending to poor households or low-income groups after completion of the Project. The Recipient shall define poor households or low-income groups in consultation with ADB prior to the commencement of lending operations.

(d) Ensuring Project Focus to the Poor

To ensure that the priority focus of the Project is the poor. CUs shall be required to maintain a subloan portfolio to low-income groups, equivalent to at least 65% of their outstanding

Partly complied with. Onlending to CUs was not implemented due to the reduction in grant fund from $7.72 million to $4.00 million and governance issues. However, CUs were given the opportunity to apply for wholesale lending from IMFTL. Not complied with. CUs were weak and the Project decided to provide lending to CU members through IMFTL. Not complied with. Instead of a revolving fund, a wholesale lending facility for CUs was established in IMFTL. Partially complied with.

Appendix 3 25

Condition/Covenant

Status of Compliance

loans from the Project at any one time. C. Microfinance Institution 8. Equity shall be provided to the MFI in compliance with the legal and policy framework recommended under the technical assistance (TA) and adopted by the Recipient. In addition, a credit line, currently estimated to be $1.5 million, shall be made available to the MFI as and when monies become available under the Project. The Recipient shall charge the MFI an interest rate of not less than 1% per annum. The detailed terms and conditions of the financing arrangements for the MFI shall be finalized under the TA. Midterm Review 9. In addition, to regular reviews by the Recipient and ADB to monitor Project progress, a comprehensive midterm review of the Project shall be carried out after one and a half years of implementation. The focus of the review shall be to evaluate actual physical and financial progress (including progress under the TA), implementation procedures, procurement, and benefit monitoring and evaluation (BME) activities.

Complied with. Equity of $2.85 million was provided from TFET. Since the IMFTL was owned by a foundation, no interest was charged for funds provided to IMFTL. Complied with.

ADB = Asian Development Bank, BME = benefit monitoring and evaluation, CITD = Commerce, Industry and Trade Division, CU = credit union, CUF = credit union federation, IMFTL = Instituicao de Microfinancas de Timor-Leste, MFI = microfinance institution, PCC = project coordination committee, PMU = project management unit, TA = technical assistance, TFET = Trust Fund for East Timor.

Appendix 4 26

TECHNICAL ASSISTANCE COMPLETION REPORT

Division: PAHQ

Amount Approved: $250,000 TA No. and Name TA 3556-TIM: Strengthening the Microfinance Policy and Legal Framework

Revised Amount: N.A.

Executing Agency: Economic Affairs Department

Source of Funding: TASF

TA Amount Undisbursed $2,439

TA Amount Utilized

$247,561 TA Completion Date Original Actual May 2001 Dec 2002

Date of Report Dec 2000 Approval Signing Fielding of consultants 06 Dec 2000 05 Feb 2001 15 Feb 2001

Account Closing Date Original Actual May 2001 Oct 2003

Description In 1999, there was an urgent need to generate employment and expand income-earning opportunities through microfinance development. However, Timor-Leste, at that time, did not have the overall regulatory framework for microfinance development. The technical assistance (TA) was prepared to help develop the necessary microfinance policy and legal framework. Objectives and Scope The objectives of the TA were to assist the Government develop and implement sustainable microfinance operations by strengthening microfinance laws and regulations, and by reviewing and revising existing banking regulations to support the establishment of specialized banks such as microfinance or rural banks. The scope of the TA focused on (i) establishment of a microfinance bank, including the preparation of supporting policies and regulations; and (ii) formulation of policies on ownership, licensing, and capital requirements to provide financial services to the poor. The TA also prepared the legislation to facilitate the formation and operation of credit unions and cooperatives. Evaluation of Inputs The core TA team consisted of a microfinance finance and banking specialist/team leader and a regulation and supervision specialist. The consultants prepared the regulatory framework for microfinance institutions (MFIs) and credit unions (CUs), incorporation papers/documents for the creation of the microfinance bank and credit unions, and other relevant documents. In lieu of the local credit union specialist, a microfinance capacity building specialist (international consultant) was engaged for the advocacy work. The consultant conducted several consultative workshops for stakeholders to facilitate the adoption of the needed policy and legal framework. The first two consultants were fielded in February 2001, while the advocacy consultant was fielded intermittently between March 2001 and November 2002. The TA was expected to be completed in 3 months. It estimated 6 person-months of international individual consultants input and 3 person-months of domestic individual consulting services. By TA completion, a total of 14 person-months of international consultancy had been required. A qualified domestic consultant was not available; as a result, an international consultant did the advocacy work for the project in order that stakeholders could be better informed of the issues involved in drafting the policy and legal framework. There was no cost overrun. The original completion date was May 2001, while the actual completion was December 2002, a year and a half later than expected. The delay was beyond the control of the project, and was mainly due to the evolving nature of the new nation, and to the fact that several institutional structures were not in place for the TA to make timely progress. Generally, the TA inputs were highly appreciated by the Government and stakeholders. The performance of the executing agency in terms of support for TA implementation was satisfactory.

Appendix 4 27

Evaluation of Outputs The consultants drafted (i) policies for the establishment of a microfinance bank, including the bylaws for incorporation, ownership, licensing, and minimum capital requirements; (ii) necessary documents for the creation of a foundation to act as the initial owner of the microfinance institution; (iii) broad policies and regulations for effective microfinance operations; and (iv) regulations for CU operations. As a result of the TA, The Foundation for Poverty Reduction (the Foundation) and the Microfinance Institution of Timor-Leste or Instituicao de Microfinancas de Timor-Leste (IMTL) were established through Executive Orders 2001/7 and 2001/8, issued in December 2001. The IMTL was issued a preliminary operating license in May 2002 by the Banking and Payments Authority (BPA), the central bank in Timor-Leste. The TA inputs were instrumental in the establishment of the IMTL and the formulation of basic CU regulations. When the IMTL was established on 12 May 2002, it received $2 million in equity from the Trust Fund for East Timor (TFET). The IMTL now has three branches. The Dili branch started in May 2002, Gleno in September 2002, and Maliana in November 2002. The TA was also instrumental in expediting the issuance of IMTL’s license. By issuing the license, the BPA authorized the IMTL to (i) receive deposits in the form of demand, time, and other types of deposits; (ii) extend credits with a minimum of 65% of portfolio for microcredits; (iii) provide payment and collection services; (iv) issue and administer current account services/checks; and (v) provide safekeeping services for valuables. With the authority to engage in demand deposit accounts, the IMTL created a settlement account with the BPA and became a member of the Timor-Leste interbank clearing system. To date, total assets of the IMTL have increased from $2.0 million to $3.0 million. Repayment is above 90%. Total loans disbursed to 4,974 borrowers have reached $1.3 million, and deposits from about 5,000 clients have reached $1.0 million.1 Overall Assessment and Rating Highly successful. The TA was instrumental in preparing the policies and legal framework for MFI and nonbank financial entities, and in building understanding in Government of the supporting policy framework. This led to the issuance of two distinct executive orders by the Government. As a result of the TA, the IMTL was established and is operating with three branches. The TA facilitated the early establishment of microfinance services, particularly in the rural areas. As a result of the TA, the IMTL is operating successfully in Timor-Leste. Major Lessons Learned

1. In a post-conflict situation, it would be unrealistic to expect that support can be provided exactly as planned, or the recommendations of the TA implemented precisely as envisaged. TA design should enable project implementation to be responsive to emerging needs and issues.

2. In an emerging nation, it is unrealistic to expect that there would be qualified domestic consultants. TA formulation should include careful assessment of domestic consultants’ availability.

3. To establish the necessary policy and legal framework for microfinance development, ample time and flexibility are required. It often takes much longer than anticipated for the necessary policies and regulations to be promulgated/implemented.

Recommendations and Follow-Up Actions

1. Further support will be needed to strengthen and eventually divest the IMTL (the Microfinance Institution). In November 2003, a divestment specialist was engaged to review IMTL’s current operations and recommend steps for IMTL’s future transformation into a commercially sustainable microfinance institution.

Prepared by Kunhamboo Kannan Designation Principal Country Programs Specialist

1 As of 30 June 2005 (at PCR), total assets of IMTL have increased from $3.0 million to $3.6 million. Repayment is around 88%. To date, total cumulative disbursements have reached $5.2 million, and deposits from 11,153 clients have reached about $1.0 million.

Appendix 5 28

SUMMARY OF SOCIOECONOMIC IMPACT ASSESSMENT A. Introduction 1. A socioeconomic survey was conducted during the project completion review mission to assess the impact of the microfinance development project. The survey covered the three branches of the Instituicao de Microfinancas de Timor-Leste (IMFTL). 2. To assess the project impacts on the beneficiaries, focus group discussions were conducted with individual IMFTL borrowers. B. Socioeconomic Impacts 3. The results of the assessment are summarized in the following paragraphs:

(i) About 75% of the borrowers used their loan to carry out income-generating activities; the balance used their loan to support children’s education and increase funds for daily family expenses. Examples of loans include additional working capital for kiosks and market stalls, and small coffee and vegetable farmers.

(ii) The number of borrowers earning $0−$20 per week from their small businesses

increased from about 73% to 83% after obtaining loans from IMFTL. About 43% of the additional income was saved or reinvested, and about 45% was used to support children’s education. The balance was used to help repair houses and buy household furniture and equipment. About 82% of those with additional income deposited their savings with IMFTL. These benefits enhanced the living standards of borrowers. The investment in the children’s education is of particular interest and long-term benefit, considering that 43% of heads of households had never gone to school. It is reported that over 50% of the borrowers are sending their children to school. The credit facility made available by the Project contributed significantly to facilitate investment in education.

(iii) The client orientation provided by IMFTL staff made borrowers more aware of the

benefits and responsibility of borrowing from a formal credit supplier. Before IMFTL was established, two thirds of the borrowers did not borrow from any other source, while about 20% borrowed from nongovernment organizations (NGOs) operating in the area, private money lenders, and relatives and neighbors. Many first-time borrowers are on their second or more cycles of borrowing,1 indicating general satisfaction with the IMFTL lending facility.

(iv) While both credit and savings facilities have been beneficial to rural communities,

nearly twice as many clients consider the credit facility more beneficial (60% compared to 38% for savings facilities). Although 60% consider that the loan terms are too short (3−6 months with daily, weekly, biweekly, and monthly repayments for market vendor, group, and business loans), 70% agree that the interest rate is appropriate.

1 A borrowing cycle is taking another loan after full payment of a previous loan.

Appendix 5 29

(v) A large number of women obtained a loan for the first time. In nearly 90% of the

loans, the decision to borrow was made jointly by husband and wife, while 40% of the loans are in the name of the wife. This indicates major participation of women in important household decisions.

(vi) For newly established small shops, all women borrowers became fully engaged

in tending the business, with the help of the older children when they are off school. For the expanded enterprises, the owners had on average an additional 2 hours a day to attend to the business.

(vii) Nearly 90% of borrowers indicated that they have savings accounts with IMFTL.

These deposits are in passbook and pledged savings accounts. (viii) There was minimal increase in borrowers’ formal social activities—only 28% of

women and 9% of farmers were members of local level organizations. About 60% did not participate in any social organization at all.

(ix) About 33% of borrowers reported that their IMFTL loan had a major impact on

the overall well-being of their families, while 60% reported an average impact. C. Conclusion 4. The socioeconomic impact on borrowers is quite significant, including better access to financial services (savings and lending facilities) at district level for the first time. The lending facility—in most cases without collateral—was a great relief in a country that has just emerged from conflict. With the support of IMFTL financial services, opportunities for diversification of income-generating activities on-farm, and off-farm rural microenterprises made a huge difference in rural households’ incomes and survival. The social impacts on beneficiaries are also significant, including better living conditions, reduced borrowing from money lenders, and increased sensitivity to gender issues and children’s education. The impact on microfinance services—especially in making small loans at affordable interest rates—has significantly improved beneficiaries’ incomes.

Appendix 6 30

FINANCIAL ANALYSIS OF SELECTED MICROENTERPRISES

Project

IRR (%)

NPV (18%

Discount) $

Group Loan (kiosk selling minor foodstuff)

Market Vendor (kiosk selling minor foodstuff)

Seasonal Crop Loan (coffee growing and harvesting)

Seasonal Crop Loan (coffee/cabbage growing and harvesting)

68

61

104

112

201.28

338.88

488.14

504.68

IRR = internal rate of return, NPV = net present value. Note: Data for estimates was provided by the Instituicao de Microfinancas de Timor-Leste for customer loan files. Source: Asian Development Bank estimates.

Appendix 7 31

INSTITUICAO DE MICROFINANCAS DE TIMOR-LESTE FINANCIAL PERFORMANCE

1. The Instituicao de Microfinancas de Timor-Leste (IMFTL), with an initial paid-up capital of $2.0 million from the Trust Fund for East Timor (TFET), is currently the largest microfinance bank with a legal license to operate in Timor-Leste as a quasi-banking institution. The paid-up capital is now $2.9 million and the equity is wholly owned by the Foundation for Poverty Reduction in East Timor (the Foundation), which is composed of donor representatives. In addition to its head office in Dili, IMFTL has three branches which provide microfinance services to 4 out of Timor-Leste’s 13 districts, and employs about 50 staff, 6 of whom are women. IMFTL has the widest outreach compared to nongovernment organizations (NGOs) to the rural poor. It started operation in May 2002 and incurred losses until 31 December 2004, though at a decreasing trend. However, in 2005, IMFTL began to realize profit from its operation and reported a net income after tax of $61,328 (as of 30 June 2005). 2. Total assets have grown 1.5 times from $2.4 million in 2002 to $3.6 million in 2005, and 97% of assets are current. The current ratio of three times (current assets over current liabilities) and the proportionately large balance of cash/liquid funds (50%) reflect a very conservative financial regime (particularly in lending), understandable for a young organization with relatively inexperienced staff in microlending. Nevertheless, loans comprise 47% of the assets. 3. The main source of funds is owners’ equity (72%) and savers’ deposits (28%). At present, IMFTL’s deposit-taking activity is constrained by the cap of $1 million on its deposit liability, imposed by Banking and Payments Authority (BPA). Total deposits were $991,888 (as of 30 June 2005) and are almost reaching the limit. IMFTL’s management has applied for a full banking license and BPA approval is expected in 2005. The full banking license will remove the deposit cap, enable IMFTL to expand its deposit-taking activities, and result in expansion of the branch network and lending operations. 4. IMFTL’s present product mix includes (i) microfinance group loans; (ii) market vendor loans; (iii) seasonal crop loans; (iv) microenterprise business loans; and (v) payroll loans to new employees (mainly in the Government). Deposit products include service accounts, checking accounts, pledged savings, and passbook savings. 5. Gross disbursements for all loan products have consistently increased from 2002 to 2005. Cumulative loan disbursements of $5.2 million covering 14,485 borrowers represent growth of 32 times in amount and 12 times in number over the period. However, the quality of the loan portfolio has been mixed. The recovery rate was 88% in 2002, 92% in 2002, 84% in 2004, and 88% in 2005. The portfolio at risk (PAR30) ratio fluctuated at 25% in 2002, 9% in 2003, 12% in 2004, and 6% in 2005. The improvement of the quality of the loan portfolio is a priority task of the newly engaged international co-general manager. 6. Loan terms range from 91 days to 1 year, with repayments on a daily, weekly, biweekly, and monthly basis depending on the loan product, with a balloon payment at the end of the loan term for seasonal crop loans. Interest at 18% per annum is uniform for all types of loans, but is collected together with the principal due, so that the effective rate (including the administration fee) is actually much higher than the nominal annual rate. In addition to interest, a loan administration fee of 5% of the loan amount is collected up-front (deducted from loan proceeds). Next to interest income, loan fees constitute the second biggest source of IMFTL income. IMFTL’s accounting software accrues interest only on current due loans; no interest is accrued on past due loans.

Appendix 7 32

7. IMFTL provides a reserve for doubtful debts (loan loss provision) in accordance with existing BPA instructions. Loans are classified according to their quality and loss provision ranges from 2% to 100%, depending on the loan classification (standard, under supervision, substandard, doubtful, and loss). 8. Interest on deposit is 0.5% per annum, computed monthly and credited to the deposit accounts. Despite the relatively large margin, IMFTL had suffered losses in its early years when it had not yet reached breakeven point. Significant expense items include salaries and wages (40%), depreciation and amortization of properties (12%), loan loss provision (12%), and the balance in other operating expenses. 9. In 2004, the Government approved the income tax law, which requires corporate entities like IMFTL to pay income tax. Tax is collected every quarter at the rate of 1% of the gross operating income. Quarterly payments are nonrefundable even if the annual operating results are a net loss and no annual income tax is due. Thus, a firm may show a net operating loss and yet pay income tax. This is what has happened IMFTL, which paid income tax of $1,649 in 2004 although operations reported a net loss of $56,748 before tax. 10. Since beginning operations in 2002, IMFTL reported the loan fees collected in advance from the borrowers as income in the year of collection, contrary to a standing BPA instruction to amortize such income over the term of the loan. In 2004, upon the advice of external auditors, IMFTL deferred $35,598 of the loan fees collected during the year, thereby increasing the loss in 2004 by this amount. If this income had not been deferred, the net loss in 2004 would have been only $19,501. IMFTL shows a consistent decreasing trend in losses since 2002. 11. IMFTL’s financial ratios for sustainability/profitability, asset/liability management, portfolio quality, and efficiency/productivity have been calculated. The negative returns on equity and assets from 2002 to 2004 reflect net losses during this period. However, due to the profitable results during the first half of 2005, these returns have now become positive: 2.6% on equity and 1.8% on assets. These rates are based on 6 month’s operation and could improve at the end of the year. The operational self-sufficiency ratio of 16% (also 6 months) is an improvement on 23% in 2004.1 Risk coverage ratio (loan loss reserve into PAR30) at 62% can be considered optimal, considering that the PAR consists of relatively “young” accounts >30 days overdue. The average disbursed loan size (value of loans disbursed into total number of loans disbursed during the period) is $305 in 2004 ($356 in 2005), while the average outstanding loan size (gross loan portfolio into number of loans outstanding) is $295 in 2004 ($439 in 2005), which are still compatible with microcredit lending guidelines. Excluding salary loans (average of $599), the average loan size of all other loans was $119, which included group loans with an average loan size of $51 but comprised only about 7% of the total outstanding loans. The cost per borrower was $82 in 2004 ($45 for 6 months in 2005) while the cost per client (borrower and depositors) is $25 ($12 for 6 months in 2005), which are comparable with competitors (credit unions and nongovernment organizations [NGOs]). The productivity of loan officers (number of active borrowers into number of loan officers) declined from 197 in 2003 to 182 in 2004, mainly due to the employment of three new additional loan officers in 2004. This rate has risen to 225 in 2005 but the quality of the portfolio should be assessed at the end of each year, or even quarterly, on the basis of the recovery rate during the period. The financial statements and projections of IMFTL are in Tables A7.1 to A7.3. 1 This ratio measures the extent that operating revenue supports operating expenses, including loan loss provision.

Appendix 7 33

12. The increasingly favorable financial ratios point to IMFTL’s growing financial soundness. However, overall staff capacity needs to be further strengthened to sustain the institution’s overall well-being. Staff morale has been raised by the recent decision, after management review, to grant salary increases of 12−50%. Monthly salaries of rank-and-file professional staff now range from $140 to $280, which are more competitive salary scales. 13. IMFTL’s financial management is well-served by the addition in 2004 of a management information system (MIS) module to existing accounting software. The MIS module includes consolidated on-time recovery ratio, on-time recovery by branch, and portfolio risk ratio by branch, loan portfolio by branch and product, and collection priorities. It is important that management analyzes these reports, as they are received monthly, and acts on them accordingly. 14. The internal control system needs to be further strengthened. At present, the internal audit unit is manned by one person who also acts as audit head-cum-bank operations staff. It would be useful to have one junior auditor hired as soon as possible. All aspects of the management and operations of the three branches and head office should be audited at least once every 3 months. Internal auditors should be knowledgeable in risk assessment, preparation of the audit plan and program, conduct of audit procedures, preparation of the audit report, and maintenance of the file of audit working papers. In addition, enhancing the current MIS module to include further analysis of deposits, loans, interest rates, etc. will strengthen IMFTL’s MIS system. IMFTL should consider the feasibility of engaging an international consultant to assist in the improvement and strengthening of its internal audit service. 15. The decision-making process also needs reassessment. Many routine management decisions are being referred to the board of directors for decision. Examples include the purchase of minor equipment, hiring and firing, and other personnel disciplinary actions, which are routine management issues and should be decided at the general manager level. 16. IMFTL is also aware of the presence of other players in the market. Based on a United Nations Development Programme and US Agency for International Development jointly funded study,2 other microfinance service suppliers in Timor-Leste include (i) three national financial NGOs that are supported by international NGOs,3 (ii) three potentially viable savings and credit cooperatives4 (which can be considered as successors to the failed credit unions), and (iii) a minimum of eight multipurpose non-financial NGOs that are providing financial services to poor households and are supported by at least five international NGOs.5 The activities of these service suppliers overlap, resulting in increasing competition in the economically active districts in Timor-Leste. Currently, however, only IMFTL has a quasi-bank license from BPA. IMFTL’s products and pricing are comparable with those of its competitors.

2 10 January 2005. Final Report – Financial Services Sector Assessment in Timor-Leste. 3 Moris Razik supported by CASHPOR, Inc; Tuba Rae Metin supported by Catholic Relief Services; and Opportunity

Timor L’orosae supported by Opportunity International. 4 Naroman in Atsabe, Ermera; Fitum Naroman in Laceil, Bobonaro; and Fini Soromutu in Dili. 5 Christian Children’s Fund; Hotflima; Timor Aid; Halarae; HAFOTI (Catholic Institute for International Relations –

Canada); Loka Dala (Oxfam, Hong Kong); Habitat for Humanity (Habitat for Humanity Int’l); LANAMONA (CARE, CIDA).

Appendix 7 34

item Actual Plan Actual Plan Actual Plan Actual Plan

AssetsCurrent AssetsCash and Cash Equivalents 2,247,241 1,851,313 2,101,231 2,090,006 2,368,533 2,600,304 1,761,172 1,378,885Loans and Advances to Customers 66,560 100,000 773,427 771,000 968,277 798,000 1,781,258 2,513,580 Less Provision for Doubtful Debts (2,377) (7,053) (30,265) (77,631) (61,265) (115,227) (101,781) (150,815) Net Loans and Advances 64,183 92,947 743,162 693,369 907,012 682,773 1,679,477 2,362,765Other Assets 5,873 0 4,500 34,000 17,431 49,000 24,996 0Total Current Assets 2,317,297 1,944,260 2,848,893 2,817,375 3,292,976 3,332,076 3,465,645 3,741,650

Non-Current AssetsProperty, Plant, and Equipment 34,757 50,000 65,112 45,000 61,085 71,000 60,636 79,727

Total Assets 2,352,054 1,994,260 2,914,005 2,862,375 3,354,061 3,403,076 3,526,282 3,821,377

LiabilitiesCurrent LiabilitiesCustomer Accounts 385,164 50,000 960,773 969,000 884,439 969,000 991,888 1,000,000Unearned Fees 0 0 0 0 35,598 0 0 0Accruals and Other Liabilities 1,158 2,000 8,123 0 8,014 0 4,158 0Total Current Liabilities 386,322 52,000 968,896 969,000 928,051 969,000 996,046 1,000,000

Total Liabilities 386,322 52,000 968,896 969,000 928,051 969,000 996,046 1,000,000

Capital and ReservesCapitalShare Capital 2,000,000 2,000,000 2,000,000 2,000,000 2,536,000 2,536,000 2,536,000 2,858,241Capital ReserveAccumulated Losses (34,268) (57,740) (54,891) (106,625) (109,990) (101,924) (5,764) (36,864)Owner's Equity 1,965,732 1,942,260 1,945,109 1,893,375 2,426,010 2,434,076 2,530,236 2,821,377

Total Liabilities and Equity 2,352,054 1,994,260 2,914,005 2,862,375 3,354,061 3,403,076 3,526,282 3,821,377

Sources: Actuals are from IMFTL financial statements; plans have been adapted from business plans prepared by Micro-Credit International Limited and from available IMFTL data.

Table A7.1: Instituicao de Microfinancas de Timor-LesteBalance Sheets, 2002−2005

($)2002 2003 2004 2005

Note: The actual statements for 2002−2004 have been audited; the half-year statements for 2005 are not yet audited. The plan for 2005 is for 1 year, while the actual is for 6 months.

Appendix 7 35

Item Actual Plan Actual Plan Actual Plan Actual PlanRevenueInterest Income and Loan Fees 23,510 48,687 177,182 252,535 196,204 505,048 220,986 522,523Other Income 377 0 7,164 0 6,422 0 8,508 0 Total Revenue 23,887 48,687 184,346 252,535 202,626 505,048 229,493 522,523

ExpensesInterest Expense 983 505 4,065 2,548 4,316 4,845 2,077 4,923Commission Expense 0 0 7,281 0 1,143 0 8,906 0Provision for Doubtful Debts 2,377 7,053 27,887 70,578 31,000 192,858 40,516 35,587Audit and Professional Fees 0 0 7,500 0 7,300 0 7,300 0Personnel Costs 33,040 58,970 86,310 140,591 105,126 196,315 53,028 264,459Security, Janitorial, and Messengerial Service 5,951 0 17,417 0 19,274 0 8,577 0Depreciation and Amortization 2,700 2,000 17,138 26,728 28,387 28,067 15,994 29,751Other Administrative Expenses 13,103 37,898 29,414 60,975 32,509 78,262 1,851 122,742Other Operating Expenses 0 0 7,957 0 27,021 0 27,875 0 Total Expenses 58,154 106,426 204,969 301,420 256,076 500,347 166,123 457,463Taxes 0 0 0 0 1,649 0 2,041 0Net Profit (Loss) for the Year/Period (34,268) (57,740) (20,623) (48,885) (55,099) 4,701 61,329 65,060Retained Earnings and Reserves 0 0 0 0 0 0 0 0Beginning of the Year 0 0 (34,268) (57,740) (54,891) (106,625) (67,093) (101,924)End of the Year/Period per Audit (34,268) (57,740) (54,891) (106,625) (109,990) (101,924) (5,763) (36,863)Reversal of Accruals in 2004 0 0 0 0 42,897 0 0 0Deficit End of the Year/Period per Audit/Books (34,268) (57,740) (54,891) (106,625) (67,093) (101,924) (5,763) (36,863)

Sources: Actuals are from IMFTL financial statements; Plans have been adapted from business plans prepared by Micro-Credit International Limited and from available IMFTL data.

Table A7.2: Instituicao de Microfinancas de Timor-LesteIncome Statements, 2002−2005

($)2002 2003 2004 2005

Note: The actual statements for 2002−2004 have been audited; the half-year statements for 2005 are not yet audited. The plan for 2005 is for 1 year, while the actual is for 6 months.

Appendix 7 36

Item 2002a 2003 2004 2005a

A. Sustainability/Profitability1. Return on average equity (1.7%) (1.0%) (2.4%) 2.4%2. Return on average assets (1.5%) (0.8%) (1.7%) 1.8%3. Operational self-sufficiency 41% 90% 79% 118%

B. Asset/Liability Management1. Yield on average gross portfolio 35% 42% 23% 16%2. Current ratio (number of times) 6 3 4 3

C. Portfolio Quality1. Portfolio at risk (PAR30) ratio 25% 9% 12% 6%2. Risk coverage ratio 14% 42% 53% 92%

D. Efficiency/Productivity1. Loan officer productivity (number of active borrowers) 61 197 182 2252. Average disbursed loan size ($) 130 272 305 3563. Average outstanding loan size ($) 78 261 295 4394. Operating expense ratiob 87% 49% 29% 12%5. Cost per borrower ($) 68 107 82 45

b This is the ratio of the total operating expense to average gross loan portfolio. The average gross loan portfolio in 2005 is nearly twice that of 2004, and this has considerably improved this ratio. However, the operating expense is only for 6 months, and therefore, on an annual basis this ratio would correspondingly go up.Source: Asian Development Bank estimates.

Table A7.3: Instituicao de Microfinancas de Timor-LesteFinancial Ratios, 2002−2005

a FY2002 covers only the period from 13 May to 31 December 2002, the first year of IMFTL's operation, while 2005 covers only the period from 1 January to 30 June 2005.

Appendix 7 37

Table A7.4: Instituicao de Microfinancas de Timor-Leste

Projected Balance Sheets, 2005−2008 ($'000)

Item 2005 2006 2007 2008 A. Assets Current Assets Cash and Cash Equivalents 1,379 1,623 1,608 1,580 Loans and Advances to Customers 2,514 2,577 3,631 4,836 Less Provision for Doubtful Debts (152) (103) (145) (193) Net Loans and Advances 2,362 2,474 3,486 4,643 Other Assets 0 534 779 999 Total Current Assets 3,741 4,631 5,873 7,222 Non-Current Assets Property, Plant, and Equipment 80 426 501 561 Total Assets 3,821 5,057 6,374 7,783 B. Liabilities Current Liabilities Customer Accounts 1,000 2,100 3,175 4,175 Unearned Fees Accruals and Other Liabilities Total Liabilities 1,000 2,100 3,175 4,175 C. Capital and Reserves Capital Share Capital 2,858 2,858 2,858 2,858 Capital Reserve 0 80 130 200 Accumulated Losses (37) 19 211 550 Owner's Equity 2,821 2,957 3,199 3,608 Total Liabilities and Equity 3,821 5,057 6,374 7,783

Source: Asian Development Bank estimates based on Micro-Credit International Limited business plans prepared for IMFTL.

Appendix 7 38

Table A7.5: Instituicao de Microfinancas de Timor-Leste

Projected Income Statements, 2005−2008 ($'000)

Item 2005 2006 2007 2008 Revenue Interest Income and Loan Fees 523 764 932 1,270Other Income 0 10 10 12 Total Revenue 523 774 942 1,282 Expenses Interest Expense 5 16 26 37Provision for Doubtful Debts 36 58 42 48Personnel Costs 263 348 336 416Depreciation and Amortization 30 95 116 133Other Operating Expenses 123 187 181 224 Total Expenses 457 704 701 858 Net Profit before Tax 65 70 240 424Taxes 0 14 48 85Net Profit (Loss) for the Year/Period 65 56 192 339Beginning of the Year (102) (37) 19 211Surplus (Deficit) End of the Year (37) 19 211 550

Source: Asian Development Bank estimates.

Appendix 7 39

Item 2006 2007 2008A. Profitability/Self-Sustainability

1. Return on average equity 2.4% 8.0% 12.0%2. Return on average assets 1.6% 4.0% 6.0%3. Operational self-sufficiency 110.0% 134.0% 149.0%

B. Asset/Liability Management1. Yield on average gross portfolio 30.0% 30.0% 30.0%2. Current ratio 2 2 2

C. Portfolio Quality1. Portfolio at risk (PAR30) ratio 4 4 42. Risk coverage ratio 90.0% 90.0% 90.0%

D. Efficiency/Productivity1. Loan officer productivity 318 377 3802. Average disbursed loan size 304 305 3203. Average outstanding loan size 238 214 2254. Operating expense ratio1 27.0% 19.0% 18.0%5. Cost per borrower 65 41 40

1 This is the ratio of the total operating expense to average gross loan portfolio.

Table A7.6: Instituicao de Microfinancas de Timor-LesteProjected Performance Monitoring Indicators, 2006−2008

Item Number Amount Number Amount Number Amount Number Amount

Cumulatively Disbursed 1,256 163,766 6,482 1,763,915 11,524 3,517,197 14,485 5,162,374Outstanding Balance 65,342 770,967 965,796 1,781,257Principal Due 49,265 431,707 465,610 723,536Principal Repaid 43,438 399,033 390,533 636,407Princial Overdue 5,827 32,674 75,077 87,129Recovery Rate (%) 88% 92% 84% 88%Principal at Risk 16,650 72,904 115,670 110,166Portfolio at risk (PAR30) Ratio (%) 25% 9% 12% 6%

Source: Asian Development Bank estimates from IMFTL financial data.

Table A7.7: Instituicao de Microfinancas de Timor-Leste

($)

2002 2003 2004 2005

Cumulative Loan Disbursements, 2002−2005

40 Appendix 8

OVERALL ASSESSMENT OF THE PROJECT

Criterion Weight (%)

Details of Performance Rating Description

Rating Value

Weighted Rating

A. Project Outcome Assessment

1. Relevance

20 The Project is consistent with the Government’s policy of poverty reduction and rebuilding the country in a post-conflict environment. The Project has laid a strong foundation for the poor and low-income households to take advantage of economic opportunities

Relevant 2 0.40

2. Efficacy 25 Within 30 months, IMFTL had a total of 14,500 loans amounting to $5.2 million, and 11,524 clients with deposits close to $1.0 million. IMFTL is rated efficacious, while the CU component is rated inefficacious. Overall, the Project is less efficacious.

Less efficacious

1 0.25

3. Efficiency 20 The project purpose and outputs in terms of quantifiable benefits have been substantially achieved through rapid business. In Timor-Leste, IMFTL has earned a reputation as an efficient conduit for delivery of much-needed microfinance services.

Efficient 1 0.20

4. Sustainability 20 Demand for repeat loans continues to grow.

Satisfactory recovery of loans.

Associated TAs helped to strengthen IMFTL’s operations.

Revised business plans, and initiatives to secure full banking license and transform into IMFTL will make the institution sustainable.

Likely 2 0.40

5. Institutional Developments and Other Impacts

15 IMFTL has adopted best international practices in its systems and procedures and has strengthened its financial position and staff capacity as a result of continuous interaction and working together with

Moderate 2 0.30

Appendix 8 41

Criterion Weight (%)

Details of Performance Rating Description

Rating Value

Weighted Rating

consultants and ADB. Beneficiaries have become more empowered and confident in decision making. Small loans provided a chance for many to improve their living conditions through opportunities to repair and refurbish damaged homes and farms. Financial services have improved the chances for more children to attend school with increased incomes from small microenterprises.

Overall Weighted Average

1.55

ADB = Asian Development Bank, CU = credit union, IMFTL = Instituicao de Microfinancas de Timor-Leste. Note: >2.5 = highly successful, 1.6–2.5 = successful, 0.6–1.5 = partly successful, <0.6 = unsuccessful. Source: Asian Development Bank estimates.