Aid Effectiveness: Microfinance as a Test Case

In spite of significant funding and a fairly broad consensus on good practice microfinance principles, many programs and investments fail to reach their objectives and even undermine markets.  The fundamental premise of CGAP’s work on improving the effectiveness of funding to microfinance is that it is the responsibility of funding agencies to get their own house in order.  Simply put, funders should improve what they can most directly influence—their own internal systems, policies, procedures and incentives.

Since 2002, CGAP has been managing a unique aid effectiveness initiative using microfinance as a test case for other development sectors. From its inception, the initiative has linked development ministers and management—the top decision-makers—with the operational staff that design, manage and monitor programs. 

CGAP’s work in this area has included short and highly action-oriented peer reviews of 17 funding agencies, three portfolio reviews, and six country level effectiveness reviews. The learning from these exercises fed into two major events that gathered high-level development leaders in 2004 and 2006.  In a bold and transparent step, these leaders resolved to take concrete actions to ensure that volumes of aid are accompanied by appropriate staffing and to place greater emphasis on performance measurement and results-based management. These commitments are encapsulated in the Compact for Better Aid for Access to Finance.

CGAP’s most recent effort in improving the effectiveness of funding flows is to develop and pilot an ambitious SmartAid for Microfinance Index to measure how well funders are set up to support microfinance effectively.

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