How Can Donors Best Support Financial Services for the Poor?

Donors who support financial services for the poor are advised to search out microfinance institutions (MFIs) that are committed to financial self-sufficiency. Sustainability—the ability of an MFI to cover all of its costs through interest paid by its clients and other income—is a cornerstone of sound microfinance. Financially sustainable MFIs can become a permanent part of the financial system because they can stay in business when grants or soft loans are no longer available.

To promote sustainable providers of financial services to the poor, donors are advised to make capacity building a key component of their microfinance programming. Many small MFIs require institution-strengthening grants and technical assistance before they can reach the operational and financial self-sufficiency needed to sustain large-scale growth.

The time-intensive task of building institutional capacity includes such varied tasks as designing and implementing a management information system; cultivating strategic and human resource management; developing financial forecasting capability; instituting transparent financial reporting, internal controls, and audit practices; and implementing a product development process. For NGOs seeking to transform into regulated financial institutions, it also means creating a shareholder organization, attracting equity investment, and forming a strong board of directors. 

At the other end of the spectrum, donors are discouraged from only funding strong MFIs that already have access to commercial and quasi-commercial banks and investments from socially responsible investors (SRIs). The principal task of donors should be to identify and bet on promising but riskier MFIs, leaving the known winners to commercial investors.

Donors are also encouraged to adjust their country-level programming to facilitate funding of global or multi-country MFI networks.  These networks provide much-needed technical assistance to their members while supporting industry-wide measures such as performance standards and transparency in financial reporting.

Recommended Reading

CGAP Donor Brief No. 1: Microfinance Donor Projects: 12 Questions about Sound Practice (Washington, D.C.: CGAP, April 2002).

Greg Chen, CGAP Focus Note No. 6: The Challenge of Growth for Microfinance Institutions:  The BancoSol Experience  (Washington, D.C.: CGAP, March 1997).

Max Clarkson, and Michael Deck, CGAP Focus Note No. 7: Effective Governance for Microfinance Institution (Washington, D.C.: CGAP, March 1997).

Fred Levy, CGAP Occasional Paper No. 5: Apex Institutions in Microfinance (Washington, D.C.: CGAP, January 2002).

Mohini Malhotra, CGAP Focus Note No. 2: Maximizing the Outreach of Micro-Enterprise Finance:  The Emerging Lessons of  Successful Programs (Washington, D.C.: CGAP, October 1995).

Paul Mosley and Brigit Helms, CGAP Focus Note No. 5: Financial Sustainability, Targeting the Poorest, and Income Impact:  Are There Trade-Offs for Microfinance Institutions? (Washington, D.C.: CGAP, December 1996).

United Nations Capital Development Fund/Special Unit on Microfinance, Policy-Related Papers on Microfinance.