Improving Access to Finance

With the 4th High LevelForum on aid effectiveness approaching in Busan, Korea, it is a good time to stop and reflect on our collective achievements toward more effective development assistance. For CGAP, which was essentially established to improve collective effectiveness among funders on access to finance for the world’s poor, this topic is of particular relevance.

There have been many global initiatives for improving development assistance. Perhaps the first was the Millennium Development Goals which set clear targets towards which development would be directed. This was followed by the first global aid effectiveness meeting in Rome and then the Paris Declaration of 2005. The Paris Declaration identified the key principles which have guided much of the discourse on effectiveness ever since, including ownership, alignment, harmonization, results and mutual accountability. The Accra Agenda for Action followed and identified several other principles such as predictability, country systems, conditionality and untying aid. The meeting in Busan is the next in these series of initiatives.

Parallel to global initiatives, sector based efforts were also launched to improve effectiveness. While sector-based efforts are, for the most part, aligned with the spirit of the Paris Declaration, there are certain areas where development agencies see themselves confronted with competing messages. The principle of harmonization tends to lead to large, multi-sector programs which risk running counter to sector-specific good practices in financial and private sector development.

Within the field of financial sector development, microfinance components in multi-sector programs often perform poorly and in some cases undermined existing financial service providers. Another challenge is finding the balance between performance-based approaches and country ownership. The use of performance-based agreements, a common practice in private sector development, is interpreted by some as “conditionality,” which obviously conflicts with the country ownership principle.

While there can be tensions between global principles and sector-specific good practices, they share a common objective: increase development effectiveness. More thought is needed reconcile the different approaches. One area in particular is how to reconcile effectiveness principles with private sector development and how the private sector can be leveraged in the development process.

CGAP’s work began with a focus on developing best practices for the microfinance industry and later evolved to include a variety of tools to improve effectiveness – training, knowledge platforms, research and pilots. In 2002, CGAP launched a focused initiative addressing the effectiveness of its core members, the 33 donors and investors which make up its governing body. Today as part of this initiative, CGAP is using an index, the SmartAid for Microfinance Index, mirroring similar attempts among academics and think tanks of quantifying the effectiveness of different aid agencies.

Access to finance for poor people is a relatively small sub-sector in terms of global aid flows – representing less than 2% of global development assistance. Yet in some ways the field has made collective improvements in its effectiveness. We have transparency on funding flows and an online platform that shows real results of institutions in which funders have put resources (the MIX). Also, public funding for access to finance has catalyzed a growing amount of private resources: in addition to the $2.1 billion disbursed by public donors in 2009, private funders contributed $1 billion. But as more private resources are invested, public funders must re-assess their catalytic role and determine where and whether they continue to add value. The role of private actors and their own need to contribute to development effectiveness emerges as another priority. These issues, as well as the broader trends in aid effectiveness will be addressed by other bloggers in this series.

This post is a first in a special series that will help us reflect on the broader aid effectiveness initiatives, CGAP’s own work on effectiveness, and what this all means for access to finance today. Watch this space for a new post every week by an expert on this topic. What are your ideas for improving aid effectiveness? Share your comments.