Good Practice Guidelines For Funders of Microfinance MICROFINANCE CONSENSUS GUIDELINES

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 AbedFounder 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 investorsthat support microfinance Bi- & multilateral development agencies Regional development banks Social & commercial investors INGOs DFIs Foundations

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

8. Country-level mechanisms FSAPs Budget Support PRSPs Integrate financial sector reforms within country-level 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 capacity • Credit components • Externally funded savings-based community-managed loan funds • Crowding out commercial capital markets and/or domestic savers • Sound ownership and governance • Wide range of financial service providers is required • Financial sustainability • Improving operational efficiency • Long-term commitment by donors and investors

12. Find institutions with a shared vision • Take informed risks on promising FSPs • Assess FSPs properly • Adapt funding to development stage • Use performance-based funding • Build exit strategies Operational guidelines – micro level The right match Building capacity • Let FSPs drive decisions • Promote transparency & accountability • Support improvements in efficiency Funding

13. Lessons learned at the meso level Constraints and challenges Success factors • Disappointing results of apex lending institutions • Weak institutional and human capacity • Lack of accurate, standardized, and comparable financial performance indicators • Building markets for support services • Investments in industry infrastructure • Advances in information systems and delivery technologies • Information disclosure, contract enforcement

14. Operational guidelines – meso level • Work with existing service providers • Fund global or multi-country networks • Ensure capacity exists before funding apexes Support meso level institutions • Technical assistance for organizational and product development • Research and development on technology use • Training and technical assistance to fill human resource gaps Invest in Foster transparency • Develop performance indicators for meso-level • Promote transparency

15. Lessons learned at the macro level Constraints and challenges Success factors • Low interest rate ceilings restrict poor people’s access to financial services • Government-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 services • Government’s most critical contribution is to maintain macroeconomic stability • Work at the policy level requires public donor staff with specialized technical capacity and experience

16. Operational guidelines – macro level Do NOT support Support • 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 • Direct provision of credit services by a government • Government-mandated portfolio quotas • Directed credit • Borrower loan guarantees • Operational subsidies

17. Macro Level Meso Level Micro Level Clients Strengthen to achieve financial sustainability to be able to reach significant numbers of poor people The 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

18. Lesson learned-what does it take for donors to be effective? Strategic clarity Appropriate instruments Staff capacity Effectiveness Knowledge management Accountability for 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 • Select experienced partners • Promote diverse financial services to help poor clients protect themselves from crises • Support partners to develop natural disaster response policies • Respect good practices: market pricing, strict loan appraisal and collection • Take a long-term approach & avoid disbursement pressure • Provide technical assistance to help manage the crisis For microfinance to work: • political stability • stable populations • sufficient economic activity

23. Reaching the remote poor Challenges What funders can do • Help develop an enabling environment • Build on existing players • Fund innovations • Use grants to fund institutional capacity • Find new ways to support member-based organizations • Dispersed and uneven demand • High information and transaction costs because of poor infrastructure and lack of client information • Weak institutional capacity of rural finance providers

24. Measuring and improving accountability on social performance Challenges What funders can do • Provide support for developing and refining common social performance tools • Collaborate with other funders to support tool and methodology refinement • Encourage retail FSPs to track their social performance • No widely accepted, cost-effective indicators of social performance • Lack of capacity to collect, analyze, and manage data to track social performance • Lack of funding to develop methodologies

25. Applying delivery technology to reduce costs Work with governments to ensure appropriate regulations Support experimentation and learning Ensure funding for technology is complemented by capacity building Support consumer education

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