The document provides guidelines for funders of microfinance to help ensure good practice and effectiveness. It outlines lessons learned at the macro, meso, and micro levels of financial systems and provides operational guidelines for funders. Key recommendations include supporting interest rate liberalization and financial inclusion while avoiding direct credit programs. The guidelines aim to help funders align their actions with their strengths and maximize positive impact for poor clients.

1. Good Practice Guidelines For
Funders of Microfinance
MICROFINANCE CONSENSUS GUIDELINES

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. 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. 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. Target audience
Staff of donors and investors
that support microfinance
Bi- &
Regional Social &
multilateral
development commercial INGOs DFIs Foundations
development
banks investors
agencies

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. Building inclusive financial systems
Macro Level
Legislation, Regulation, Supervision
Meso Level
Support Services and Infrastructure
Micro Level
Financial Service Providers
Clients

8. Country-level mechanisms
FSAPs
Integrate financial sector
Budget
reforms within country-level PRSPs
Support mechanisms
SWAPs

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. 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. 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. 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. 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. 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. 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. 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. 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. Lesson learned-what does it take for donors
to be effective?
Strategic
clarity
Appropriate Staff
instruments capacity
Effectiveness
Knowledge Accountability for
management results

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. Act on comparative advantage
Align
actions
with
strengths
Expand Consolidate Delegate Phase out

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. 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. 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. 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. 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. 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. 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