Aid Effectiveness in Microfinance

15 April 2006

Microfinance is a worldwide success story. But how effective have aid agencies been in their support to microfinance institutions (MFIs)? Since 2002, CGAP member agencies have tackled this question through “peer reviews” and evaluations of project portfolios and country programs. This Focus Note looks at the examples of two agencies—the World Bank and the United Nations Development Programme (UNDP)—that took the courageous step of asking CGAP for an in-depth external evaluation of their microcredit portfolios. The World Bank evaluation reviewed only “lines of credit,” where project resources were used to fund microlending; thus, the study did not include the Bank’s substantial activities in policy support for governments and technical assistance to MFIs. The UNDP evaluation covered all that agency’s microfinance projects, but only two of those projects were policy-oriented and none of them provided technical assistance only.

The evaluations revealed a disappointing picture: in both agencies, less than a quarter of the projects that funded microlending were judged successful. The rest failed, or appeared unlikely, to produce long-lasting results—that is, retail institutions and programs that could continue offering clients quality financial services over the longer term without losing their capital and needing continuing infusions of money from governments or development agencies.

Both UNDP and the World Bank have talented, motivated staff managing their microcredit. The root of the problem is not weak staff, but rather agency environments and systems that do not give their staff the right incentives, information, and resources for microcredit.