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DONOR INFORMATION RESOURCE CENTRE
Helping to Improve Donor Effectiveness in Microfinance
www.microfinancegateway.org
Key Principles of Microfinance
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This is a DIRECT presentation designed for microfinancedonors. These slides may be used or changed withoutpermission. Attribution to CGAP/DIRECT is appreciated.
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July 15, 2004
PRESENTATION INSTRUCTIONS
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Overview
CGAP is a consortium of 28 public and private
development agencies working together to
expand access to financial services for the
poor, referred to as microfinance.These principles were developed and endorsed
by CGAP and its 28 member donors, and further
endorsed by the Group of Eight leaders at the
G8 Summit on 10 June 2004.
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1. Poor people needa variety of financial services
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Meeting the Needs of Poor People
LoansSavings
InsuranceCash
Transfer
Services
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2. Microfinance is a powerful toolto fight poverty
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From Everyday Survival
to Planning for the Future
Access to financial servicesAccess to financial services
Increase & diversify incomesIncrease & diversify incomes
Build assetsBuild assets
Mitigate riskMitigate risk
Plan for the futurePlan for the future
Make choicesMake choices
Increase food consumptionIncrease food consumption
Invest in education & healthInvest in education & health
Invest in housing, water, sanitationInvest in housing, water, sanitation
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3. Microfinance means buildingfinancial systems that serve the poor
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Taking a Financial Systems Approach
In most developing countries, poor people are the majorityof the population but least likely to be served by banks.
Microfinance is often seen as a marginal sector, not as partof the countrys mainstream financial system.
Microfinance will reach the maximum number of poorclients only when it is integrated into the financial sector.
Take a financial systems approach tomicrofinance
Focus support on aspects of the financial systemaccording to comparative advantage
Collaborate with other donors and stakeholders
Customize support for the specific need
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4. Microfinance can pay for itself, and
must do so to reach very large
numbers of poor people
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Achieving Long Term Scale and Impact
To reach scale and impact, strong institutions must chargeenough to cover their costs.
Cost recovery is the only way a financially sustainableinstitution can continue and expand services over the long
term.
Lowering transaction costs
Offering services that are moreuseful to clients
Finding new ways to reachmore of the unbanked poor.
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5. Microfinance is about buildingpermanent local financial institutions
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Building Local Financial Institutions
Financial
services
Less dependence on
funding from donors and
governments
Sound
Domestic
Financial
Institutions
Domestic
Savings
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6. Microcredit is not always the answer.Microcredit is not the best tool for everyone
or every situation.
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Using Other Tools When Necessary
Destitute people with noincome or means of
repayment need other kinds
of support before they canmake good use of loans.
Where possible, suchservices should be coupled
with building savings.
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7. Interest rate ceilings hurt poor people bymaking it harder for them to get credit
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Enabling Microlenders to Cover their
Costs
It costs much more to make manysmall loans than a few large loans.
If Microlenders cannot chargeinterest rates well above averagebank loan rates:
They cannot cover their costs
Their growth is limited by the scarce anduncertain supply of soft money fromdonors or governments
But microlenders should not passalong inefficiencies to poorborrowers
AVOID INTERESTRATE CAPS
When governmentsregulate interest
rates, they usuallyset them at levels
so low thatmicrocredit cannot
cover its costs
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8. The role of government is to enablefinancial services, not to provide them
directly
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Setting Sound Policy and Legal
Frameworks
Rather than act as direct providers offinancial services, governments need to:
Set policies that stimulate financial services for poor peopleat the same time as protecting deposits
Maintain macroeconomic stability
Clamp down on corruption
Improve the environment for micro-businesses, includingaccess to markets and infrastructure
Avoid interest rate caps
Refrain from distorting markets with subsidized, high-defaultloan programs that cannot be sustained
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9. Donor funds should complement privatecapital, not compete with it
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Building Capacity
Donor grants, loans, and equity for microfinanceshould be temporary and used to:
Build the capacity of microfinance providers
Develop supporting infrastructure like rating agencies, creditbureaus, and audit capacity
Support experimentation
Donors should:
Try to integrate microfinance with the rest of the financialsystem.
Use experts with a track record of success when designing andimplementing projects
Set clear performance targets that must be met before fundingis continued
Set a realistic plan for reaching a point where donor support isno longer needed
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10. The key bottleneck is the shortage ofstrong institutions and managers
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Building Strong Institutions
and Managers
Public and private investments in microfinance shouldfocus on building capacity, not just moving money
Skills and systems need to be built at all levels:
Managers of microfinance institutions
Central banks
Information systems
Donors
Other government agencies
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11. Microfinance works best when itmeasures - and discloses - its performance.
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Supporting Transparency and
Standard Reporting
Donors, investors, banking supervisors, andcustomers need accurate, standardized performanceinformation to judge their cost, risk, and return:
Financial information (e.g.,interest rates, loan repayment,and cost recovery)
Social information (e.g.,
number of clients reached andtheir poverty level)
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Summary
1. Poor people need a variety of financial services, not just loans.2. Microfinance is a powerful tool to fight poverty.
3. Microfinance means building financial systems that serve the poor.
4. Microfinance must pay for itself to reach large numbers of poor people.
5. Microfinance is about building permanent local financial institutions.6. Microcredit is not the best tool for everyone or every situation.
7. Interest rate ceilings making it harder for poor people to get credit.
8. The role of government is to enable financial services, not to provide them.
9. Donor funds should complement private capital, not compete with it.10. The key bottleneck is the shortage of strong institutions and managers.
11. Microfinance works best when it measures and discloses its performance.
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Where To Get More Information
Contact: Nataa Goronja
1818 H Street, NW Washington, DC 20433
Tel: 202-473-9594 Fax: 202-522-3744
E-mail: [email protected]
Web: www.cgap.org
CGAP DIRECT website: http://www.cgap.org/direct/