Five Elements of Effectiveness

Five core elements of effectiveness emerged from the 17 Microfinance Donor Peer Reviews. These elements, while not exhaustive, are key to improving aid effectiveness at the individual agency level. These same elements also help determine an agency's comparative advantage in microfinance vis-à-vis other donors and investors when supporting financial services for the poor people. The five elements are:

Strategic Clarity: Agency-wide vision in line with international good practice.
Agencies with strategic clarity understand the importance of building inclusive financial systems and align their operations with that vision. Rather than stifle diversity and creativity, a coherent approach promotes consistent application of good-practice principles. A sound microfinance policy is important, but by itself is not enough: it must be internalized by staff and translated into results on the ground.

Staff Capacity: Sufficient technical expertise to manage operations.
Agencies need a few dedicated microfinance experts—either individuals or a central unit--who serve as an internal resource for technical advice and quality assurance. Project managers should also have enough training in microfinance basics to ask the right questions, select qualified consultants, and interpret performance reports. An agency's incentive structure should encourage project managers to take advantage of its microfinance experts.

Accountability for Results: Transparency about microfinance programming and performance.
Agencies need appropriate systems that make it possible to identify projects with a microfinance component and hold project managers accountable for accessing technical input at the design stage. Decisions on whether to continue, terminate, or replicate a program should be guided by performance against measurable objectives, such as financial and social performance indicators. Pressure to approve and disburse projects should not take precedence over setting up systems to ensure accountability.

Relevant Knowledge Management: Systematic application of lessons learned.
Capturing information about what works and what does not is only the first step to ensure the learning from failures as well as successes is incorporated into new projects. Deliberate communication strategies are needed to make sure that this information is actually applied to operations. Agencies need to get the right information to the right people at the right time. Knowledge management should be a performance objective, for example, through job descriptions and thematic network participation.

Appropriate Instruments: Instruments for microfinance that are used in a flexible manner and adapted to market needs.
Effective agencies are able to work with a range of actors (public and private) that are well suited to support microfinance. Agencies should strive to adapt their instruments to enable them to implement their strategies effectively and to be responsive to market needs and the development stage of a market. Including microfinance services as minority components of multi-sector programs is rather to be avoided.