20966 Key Principles of Micro Finance D2

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DONOR INFORMATION RESOURCE CENTRE

Helping to Improve Donor Effectiveness in Microfinance

www.microfinancegateway.org

Key Principles of Microfinance


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This is a DIRECT presentation designed for microfinancedonors. These slides may be used or changed withoutpermission. Attribution to CGAP/DIRECT is appreciated.

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July 15, 2004

PRESENTATION INSTRUCTIONS


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Overview

CGAP is a consortium of 28 public and private

development agencies working together to

expand access to financial services for the

poor, referred to as microfinance.These principles were developed and endorsed

by CGAP and its 28 member donors, and further

endorsed by the Group of Eight leaders at the

G8 Summit on 10 June 2004.


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1. Poor people needa variety of financial services


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Meeting the Needs of Poor People

LoansSavings

InsuranceCash

Transfer

Services


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2. Microfinance is a powerful toolto fight poverty


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From Everyday Survival

to Planning for the Future

Access to financial servicesAccess to financial services

Increase & diversify incomesIncrease & diversify incomes

Build assetsBuild assets

Mitigate riskMitigate risk

Plan for the futurePlan for the future

Make choicesMake choices

Increase food consumptionIncrease food consumption

Invest in education & healthInvest in education & health

Invest in housing, water, sanitationInvest in housing, water, sanitation


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3. Microfinance means buildingfinancial systems that serve the poor


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Taking a Financial Systems Approach

In most developing countries, poor people are the majorityof the population but least likely to be served by banks.

Microfinance is often seen as a marginal sector, not as partof the countrys mainstream financial system.

Microfinance will reach the maximum number of poorclients only when it is integrated into the financial sector.

Take a financial systems approach tomicrofinance

Focus support on aspects of the financial systemaccording to comparative advantage

Collaborate with other donors and stakeholders

Customize support for the specific need


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4. Microfinance can pay for itself, and

must do so to reach very large

numbers of poor people


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Achieving Long Term Scale and Impact

To reach scale and impact, strong institutions must chargeenough to cover their costs.

Cost recovery is the only way a financially sustainableinstitution can continue and expand services over the long

term.

Lowering transaction costs

Offering services that are moreuseful to clients

Finding new ways to reachmore of the unbanked poor.


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5. Microfinance is about buildingpermanent local financial institutions


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Building Local Financial Institutions

Financial

services

Less dependence on

funding from donors and

governments

Sound

Domestic

Financial

Institutions

Domestic

Savings


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6. Microcredit is not always the answer.Microcredit is not the best tool for everyone

or every situation.


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Using Other Tools When Necessary

Destitute people with noincome or means of

repayment need other kinds

of support before they canmake good use of loans.

Where possible, suchservices should be coupled

with building savings.


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7. Interest rate ceilings hurt poor people bymaking it harder for them to get credit


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Enabling Microlenders to Cover their

Costs

It costs much more to make manysmall loans than a few large loans.

If Microlenders cannot chargeinterest rates well above averagebank loan rates:

They cannot cover their costs

Their growth is limited by the scarce anduncertain supply of soft money fromdonors or governments

But microlenders should not passalong inefficiencies to poorborrowers

AVOID INTERESTRATE CAPS

When governmentsregulate interest

rates, they usuallyset them at levels

so low thatmicrocredit cannot

cover its costs


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8. The role of government is to enablefinancial services, not to provide them

directly


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Setting Sound Policy and Legal

Frameworks

Rather than act as direct providers offinancial services, governments need to:

Set policies that stimulate financial services for poor peopleat the same time as protecting deposits

Maintain macroeconomic stability

Clamp down on corruption

Improve the environment for micro-businesses, includingaccess to markets and infrastructure

Avoid interest rate caps

Refrain from distorting markets with subsidized, high-defaultloan programs that cannot be sustained


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9. Donor funds should complement privatecapital, not compete with it


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Building Capacity

Donor grants, loans, and equity for microfinanceshould be temporary and used to:

Build the capacity of microfinance providers

Develop supporting infrastructure like rating agencies, creditbureaus, and audit capacity

Support experimentation

Donors should:

Try to integrate microfinance with the rest of the financialsystem.

Use experts with a track record of success when designing andimplementing projects

Set clear performance targets that must be met before fundingis continued

Set a realistic plan for reaching a point where donor support isno longer needed


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10. The key bottleneck is the shortage ofstrong institutions and managers


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Building Strong Institutions

and Managers

Public and private investments in microfinance shouldfocus on building capacity, not just moving money

Skills and systems need to be built at all levels:

Managers of microfinance institutions

Central banks

Information systems

Donors

Other government agencies


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11. Microfinance works best when itmeasures - and discloses - its performance.


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Supporting Transparency and

Standard Reporting

Donors, investors, banking supervisors, andcustomers need accurate, standardized performanceinformation to judge their cost, risk, and return:

Financial information (e.g.,interest rates, loan repayment,and cost recovery)

Social information (e.g.,

number of clients reached andtheir poverty level)


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Summary

1. Poor people need a variety of financial services, not just loans.2. Microfinance is a powerful tool to fight poverty.

3. Microfinance means building financial systems that serve the poor.

4. Microfinance must pay for itself to reach large numbers of poor people.

5. Microfinance is about building permanent local financial institutions.6. Microcredit is not the best tool for everyone or every situation.

7. Interest rate ceilings making it harder for poor people to get credit.

8. The role of government is to enable financial services, not to provide them.

9. Donor funds should complement private capital, not compete with it.10. The key bottleneck is the shortage of strong institutions and managers.

11. Microfinance works best when it measures and discloses its performance.


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Where To Get More Information

Contact: Nataa Goronja

1818 H Street, NW Washington, DC 20433

Tel: 202-473-9594 Fax: 202-522-3744

E-mail: [email protected]

Web: www.cgap.org

CGAP DIRECT website: http://www.cgap.org/direct/

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20966 Key Principles of Micro Finance D2