Good Practice Guidelines For Funders of Microfinance

MICROFINANCE CONSENSUS GUIDELINES

• Purpose and target audience

• Inclusive financial systems and the role of funders

• Understanding the needs of poor clients

• Lessons learned and operational guidelines at three levels of the financial system

• Ensuring the effectiveness of funders

• Frontier issues

OverviewOverview

Commitment to applying good practice comes from the highest level 30 heads of agencies endorsed the Guidelines at the Better Aid for Access to Finance meeting in October 2006

High level endorsementHigh level endorsement

“Every person working for a funding agency is the repository of extraordinary power and can be a

catalyst of change.”Fazle Hasan Abed

Founder and Chairperson, BRAC

Raise awareness of good practice

Address the key question: What is the best use of subsidies?

Translate lessons learned into practical operational guidelines

Support diverse approaches within a framework of good practice principles

Purpose of the GuidelinesPurpose of the Guidelines

Staff of donors and investorsthat support microfinance

Target audienceTarget audience

Bi- & multilateral

development agencies

Regional development

banks

Social & commercial

investorsINGOs DFIs Foundations

A wide range of financial services for poor people everywhere

…delivered by different types of institutions

…through a variety of convenient mechanisms.

Vision for inclusive financial systemsVision for inclusive financial systems

Building inclusive financial systemsBuilding inclusive financial systems

Clients

Macro LevelLegislation, Regulation, Supervision

Micro LevelFinancial Service Providers

Meso LevelSupport Services and Infrastructure

Country-level mechanismsCountry-level mechanisms

Budget Support PRSPs

Integrate financial sector reforms within country-level

mechanisms

SWAPs

FSAPs

Financial service needs of poor clients Financial service needs of poor clients

• Poor clients need and are willing to pay for a variety of financial services

• Poor people save• Financial services for the poor should be demand-driven• Financial service providers are best placed to understand client

needs and design appropriate services • Microcredit may not be appropriate for every situation• Consumer protection initiatives can protect microfinance clients

from predatory lenders

Lessons learned

Financial service needs of poor clientsFinancial service needs of poor clients

• Verify that credit is truly needed • Do not use microcredit as a resource

transfer mechanism for high risk groups• Do not push financial institutions to develop

services that overload their capacity• Conduct due diligence to ensure financial

service providers have sufficient capacity before engaging in product development

• Provide flexible funding for research and development and technical assistance for capacity building

• Support consumer protection measures

Operational guidelines for funders

Sound ownership and governanceWide range of financial service providers is requiredFinancial sustainabilityImproving operational efficiencyLong-term commitment by donors and investors

Success factorsSuccess factors

Lack of strong retail capacityCredit componentsExternally funded savings-based community-managed loan fundsCrowding out commercial capital markets and/or domestic savers

Constraints and challengesConstraints and challenges

Lessons learned at the micro levelLessons learned at the micro level

Operational guidelines – micro levelOperational guidelines – micro level

• Let FSPs drive decisions• Promote transparency & accountability• Support improvements in efficiency

• Adapt funding to development stage• Use performance-based funding• Build exit strategies

The right match

Building capacity

Funding

• Find institutions with a shared vision• Take informed risks on promising FSPs• Assess FSPs properly

Constraints and challengesConstraints and challenges Success factorsSuccess factors

Lessons learned at the meso levelLessons learned at the meso level

Disappointing results of apex lending institutionsWeak institutional and human capacityLack of accurate, standardized, and comparable financial performance indicators

Building markets for support servicesInvestments in industry infrastructureAdvances in information systems and delivery technologiesInformation disclosure, contract enforcement

Operational guidelines – meso levelOperational guidelines – meso level

• Develop performance indicators for meso-level

• Promote transparency

• Technical assistance for organizational and product development

• Research and development on technology use

• Training and technical assistance to fill human resource gaps

• Work with existing service providers • Fund global or multi-country networks• Ensure capacity exists before funding

apexes

Support mesolevel institutions

Invest in

Foster transparency

Lessons learned at the macro levelLessons learned at the macro level

Constraints and challengesConstraints and challenges Success factorsSuccess factors

Low interest rate ceilings restrict poor people’s access to financial servicesGovernment-run credit programs generally distort markets because they are subject to political rather than commercial imperatives

Government’s primary role is as an enabler, not a direct provider of financial servicesGovernment’s most critical contribution is to maintain macroeconomic stabilityWork at the policy level requires public donor staff with specialized technical capacity and experience

Operational guidelines – macro levelOperational guidelines – macro level

Direct provision of credit services by a governmentGovernment-mandated portfolio quotasDirected creditBorrower loan guaranteesOperational subsidies

Interest rate liberalization Consumer protection

measures Policies that reduce barriers to

market entry of financial institutions

Building capacity of key government staff

Improved legal frameworks for collateral, taxation, and registration

Support Do NOT support

The role of donors and investorsThe role of donors and investors

Support interest rate liberalization, inflation control, & prudential regulation

and supervision of deposit-taking institutions

Strengthen capacity and extend services to microfinance

Strengthen to achieve financial sustainability to be able to reach

significant numbers of poor people

Clients

Macro Level

Micro Level

Meso Level

Strategic clarity

Staff capacity

Accountability for results

Knowledge management

Appropriate instruments

Lesson learned-what does it take for donors to be effective?Lesson learned-what does it take for donors to be effective?

Effectiveness

Donor effectivenessDonor effectiveness

• Define comparative advantage and determine the optimal level of involvement in microfinance

• Develop and disseminate agency-wide microfinance policies• Provide staff training• Establish strong technical contacts• Avoid credit components• Collect key performance information• Set up knowledge networks• Designate funding for knowledge generation and dissemination• Use a range of instruments• Place microfinance specialists within a financial/private-sector

development unit or department

Operational guidelines

Act on comparative advantageAct on comparative advantage

Expand Consolidate Delegate Phase out

Align actions

with strengths

Frontier issuesFrontier issues

• Effectiveness in post-conflict and post-disaster situations

• Reaching the remote poor• Measuring and improving accountability on social

performance• Applying delivery technology to reduce costs• Tapping domestic funding markets – emerging solutions • Graduating the poorest into microfinance

Many core issues remain unsolved….

Select experienced partnersPromote diverse financial services to help poor clients protect themselves from crisesSupport partners to develop natural disaster response policies

Post-conflict and post-disaster situationsPost-conflict and post-disaster situations

Respect good practices: market pricing, strict loan appraisal and collectionTake a long-term approach & avoid disbursement pressureProvide technical assistance to help manage the crisis

For microfinance to work:

political stabilitystable populations

sufficient economic activity

Reaching the remote poorReaching the remote poor

Help develop an enabling environmentBuild on existing playersFund innovationsUse grants to fund institutional capacityFind new ways to support member-based organizations

What funders can doChallenges

Dispersed and uneven demandHigh information and transaction costs because of poor infrastructure and lack of client informationWeak institutional capacity of rural finance providers

Measuring and improving accountability on social performanceMeasuring and improving accountability on social performance

Provide support for developing and refining common social performance toolsCollaborate with other funders to support tool and methodology refinementEncourage retail FSPs to track their social performance

What funders can doChallenges

No widely accepted, cost-effective indicators of social performanceLack of capacity to collect, analyze, and manage data to track social performanceLack of funding to develop methodologies

Applying delivery technology to reduce costsApplying delivery technology to reduce costs

Support experimentation and learning

Support consumer education

Ensure funding for technology is

complemented by capacity building

Work with governmentsto ensure appropriate

regulations

• Build capacity of financial service providers for pro-poor savings mobilization

• Explore using financial innovations to link microfinance to domestic funding markets

• Provide funding in local currency or enable microfinance institutions to be protected from currency movements

• Support broader capital markets development• Improve availability of performance information• Build methods for better understanding of true

liquidity needs

Tapping domestic funding markets –emerging solutionsTapping domestic funding markets –emerging solutions

Graduating the poorest into microfinanceGraduating the poorest into microfinance

• Provide grants for social safety net support and skills training programs

• Experiment with different models for linking the poorest clients to MFIs

• Develop appropriate ways to measure the cost effectiveness of non-financial service graduation programs

• Create barriers between grants and loan programs