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The Consultative GroupTo Assist the Poorest

‘Microcredit in ECA: Linkages with Community-Driven Development’

Doug Pearce

CGAP

April 10, 2001

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Microcredit – a basic definition

Microcredit refers essentially to methodologies for making very small loans to low-income households

Microcredit can be offered through formal financial institutions or informal financial institutions

Microcredit is only one aspect of Microfinance, which includes a range of financial services.

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What is CGAP?

The Consultative Group to Assist the Poorest was formed in 1995 by the major donors and MFIs to set standards, develop & disseminate technical tools and training, and help build the microfinance industry.

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CGAP: Service Center for MFI Industry

Services

Technical Tools & Services

Strategic & Technical

Advice/Exchange

Training

MFIs - Technical Guides & Software

- TA on Fin. Mgmt. - Local MFI staff training

Member Donors

- MFI Disclosure Guidelines

- In-country Donor Coordination

-Donor Staff Training

Cli

en

ts

MFI Industry

- Web-based services for MIS, Audit, Impact Assessment etc.

- Consult on Regulation & Supervision

- Training Auditors in MF

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Technical Tools & Services

MFIs Series of handbooks and software on topics in financial management On line ‘consumer report’ service on MIS software

Member Donors Appraisal and Monitoring Service Global Donor Portfolio Database Disclosure guidelines for MFI financial statements Tool for measuring poverty levels of MFI clients

MFI Industry On-line MFI Audit services Fund for ratings/appraisals of MFIs

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Strategic and Technical Advice/Exchange

MFIs TA in business planning, financial modeling Strategic advice to banks entering micro-finance

Member Donors CGAP staff -donor relationship managers: support, advice, referrals Stimulating national level donor coordination

MFI Industry Work with rating agencies, regulators, supervisors Study of West Africa legal frameworks for MFIs

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Training and Capacity Building

MFIs 6 capacity building hubs and partners - building local markets of service providers

Member Donors Donor staff training CD rom distance learning courses for field staff

MFI Industry Capacity building and certification of external auditors in

microfinance audit Boulder, Microfinance Training Program

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Microfinance Gateway: a CGAP service to the industry

On-line library of thousands of documents and technical tools

Simple browse by 5 keytopics leading to recommended reading

Simple and easy search by topics, keywords, authors

Industry information hub

Forum to share knowledge and information.

Job Marketplace

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Building Local Markets for Training services in ECA

Microfinance Center, Warsaw

4 CGAP courses available, plus 2 ‘own’ courses

21 courses delivered to date 342 MFI staff trained 33 countries have sent

participants to courses 15 certified trainers Courses translated into

Russian and Bosnian/Serbian/Croatian

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Microcredit in ECA

‘New’ emerging industry Fewer MFIs Higher-end clientele Focus on enterprise

lending Microfinance sector

development varies by country

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Microcredit at the Community-level in ECA

Community-level, but not community-owned or managed:Includes:• Branches of commercial banks and microfinance banks• National or regional Credit Unions• International, national or regional NGOs

Community-owned or community-managed: • Village Banks • Informal Savings and Loans mechanisms• Community NGOs• Community-level Credit Unions• Savings and Credit Associations (SCAs)

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Microcredit at the Community-level in ECA

Formalization of community-owned or managed institutions may be the way forward in ECA

Informal financial institutions limited by legal and capacity issues

Formal financial institutions can offer a wider range of services Credit Unions/Cooperatives offer a formal sector model with

scope for community representation and relevance

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Microcredit at the Community-level in ECA

How can the World Bank and other donors assist informal financial institutions to formalize, without losing community-relevance?

• Key legal role for the Bank to play in the interim period as an informal model formalizes

• Institutional strengthening of a second tier entity.

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Community-level responses in challenging situations for Microcredit

Other interventions may need to precede or accompany microcredit, such as:

• Entitlement payments (grants, termination payments…)

• Training and capacity-building

• Infrastructure investment and maintenance

• Institution-building

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Community-level responses in challenging situations for Microcredit: Examples

Depressed industrial/mining regions:• Skills training and employment reorientation • Termination payments instead of microcredit

Isolated rural areas with low levels of economic activity:• Community-level infrastructure can help open up access to

markets and facilitate economic activity. • Productive/Commercial infrastructure should be financed through

a loan

Where past experience with subsidized credit has accustomed the population to poor repayment behavior:• General response: microcredit done on a sustainable basis, by a

specialized (formal or informal) financial institution

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Conclusions/Points for Discussion

Microcredit has great potential to unleash economic potential, but other interventions may be required first.

Improved linkages between microcredit and CDD needed, including inter-linked programming responses

Scope for informal financial institutions may be more limited in ECA than elsewhere. Therefore:• assist informal financial sector to formalize, and • build-on the existing cooperative/credit union system and

tradition