Good Practice Guidelines For Funders Of Microfinance Presentation (2006) 28p R20090505 B


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Good Practice Guidelines For Funders Of Microfinance Presentation (2006) 28p R20090505 B

  1. 1. Good Practice Guidelines For Funders of Microfinance MICROFINANCE CONSENSUS GUIDELINES
  2. 2. Overview • 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
  3. 3. High level endorsement 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 “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
  4. 4. Purpose of the Guidelines 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
  5. 5. Target audience Staff of donors and investors that support microfinance Bi- & Regional Social & multilateral development commercial INGOs DFIs Foundations development banks investors agencies
  6. 6. Vision for inclusive financial systems A wide range of financial services for poor people everywhere …delivered by different types of institutions …through a variety of convenient mechanisms.
  7. 7. Building inclusive financial systems Macro Level Legislation, Regulation, Supervision Meso Level Support Services and Infrastructure Micro Level Financial Service Providers Clients
  8. 8. Country-level mechanisms FSAPs Integrate financial sector Budget reforms within country-level PRSPs Support mechanisms SWAPs
  9. 9. Financial service needs of poor clients Lessons learned • 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
  10. 10. Financial service needs of poor clients Operational guidelines for funders • 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
  11. 11. Lessons learned at the micro level Constraints and challenges Success factors Lack of strong retail Sound ownership and capacity governance Credit components Wide range of financial Externally funded savings- service providers is required based community- Financial sustainability managed loan funds Improving operational Crowding out commercial efficiency capital markets and/or Long-term commitment by domestic savers donors and investors
  12. 12. Operational guidelines – micro level • Find institutions with a shared vision • Take informed risks on promising FSPs The right match • Assess FSPs properly • Let FSPs drive decisions Building • Promote transparency & accountability • Support improvements in efficiency capacity • Adapt funding to development stage • Use performance-based funding Funding • Build exit strategies
  13. 13. Lessons learned at the meso level Constraints and challenges Success factors Disappointing results of Building markets for apex lending institutions support services Weak institutional and Investments in industry human capacity infrastructure Lack of accurate, Advances in information standardized, and systems and delivery comparable financial technologies performance indicators Information disclosure, contract enforcement
  14. 14. Operational guidelines – meso level • Work with existing service providers Support meso • Fund global or multi-country networks level institutions • Ensure capacity exists before funding apexes • Technical assistance for organizational and product development • Research and development on Invest in technology use • Training and technical assistance to fill human resource gaps Foster • Develop performance indicators for meso-level transparency • Promote transparency
  15. 15. Lessons learned at the macro level Constraints and challenges Success factors Low interest rate ceilings Government’s primary role restrict poor people’s is as an enabler, not a direct access to financial services provider of financial services Government-run credit Government’s most critical programs generally distort contribution is to maintain markets because they are macroeconomic stability subject to political rather Work at the policy level than commercial requires public donor staff imperatives with specialized technical capacity and experience
  16. 16. Operational guidelines – macro level Support Do NOT support  Interest rate liberalization Direct provision of credit  Consumer protection services by a government measures Government-mandated  Policies that reduce barriers to portfolio quotas market entry of financial Directed credit institutions Borrower loan guarantees  Building capacity of key Operational subsidies government staff  Improved legal frameworks for collateral, taxation, and registration
  17. 17. The role of donors and investors Support interest rate liberalization, inflation control, & prudential regulation and supervision of deposit-taking Macro Level institutions Meso Level Strengthen capacity and extend services to microfinance Micro Level Clients Strengthen to achieve financial sustainability to be able to reach significant numbers of poor people
  18. 18. Lesson learned-what does it take for donors to be effective? Strategic clarity Appropriate Staff instruments capacity Effectiveness Knowledge Accountability for management results
  19. 19. Donor effectiveness Operational guidelines • 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
  20. 20. Act on comparative advantage Align actions with strengths Expand Consolidate Delegate Phase out
  21. 21. Frontier issues Many core issues remain unsolved…. • 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
  22. 22. Post-conflict and post-disaster situations Respect good Select experienced practices: market partners pricing, strict loan Promote diverse appraisal and For microfinance to financial services to collection work: help poor clients Take a long-term political stability protect themselves approach & avoid stable populations from crises disbursement sufficient economic Support partners to pressure activity develop natural Provide technical disaster response assistance to help policies manage the crisis
  23. 23. Reaching the remote poor Challenges What funders can do Help develop an enabling Dispersed and uneven environment demand Build on existing players High information and transaction costs because Fund innovations of poor infrastructure and Use grants to fund lack of client information institutional capacity Weak institutional capacity Find new ways to support of rural finance providers member-based organizations
  24. 24. Measuring and improving accountability on social performance Challenges What funders can do Provide support for No widely accepted, cost- developing and refining effective indicators of social common social performance performance tools Lack of capacity to collect, Collaborate with other analyze, and manage data to funders to support tool and track social performance methodology refinement Lack of funding to develop Encourage retail FSPs to methodologies track their social performance
  25. 25. Applying delivery technology to reduce costs Support experimentation Work with governments and learning to ensure appropriate regulations Ensure funding for technology is Support consumer complemented education by capacity building
  26. 26. Tapping domestic funding markets – emerging solutions • 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
  27. 27. Graduating 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