Aid Effectiveness in Microfinance: Evaluating Microcredit Projects of the World Bank and the United Nations Development Programme

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This note sets out the results of an in-depth evaluation of the microcredit portfolios of the World Bank and the United Nations Development Programme. The World Bank evaluation reviewed only “lines of credit”, where project resources were used to fund microlending; thus, the study did not only include the Bank’s activities in policy support for governments and technical assistance to MFIs. The UNDP evaluation covered all its microlending projects, but only two of those projects were policy orientated and none of them provided technical assistance only.

The results provide a “disappointing picture”. They show that 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. The cause of the problem is not put down to weak staff at these agencies; instead the study suggests that agency environments and systems do not give their staff the right incentives, information, and resources for microcredit.

The note begins by setting out the scope and methodology of the evaluation before providing an in-depth analysis of the findings. It then discusses in turn each of the root causes associated with the poor results – incentives, information and resources. Finally the note sets out the recommendations.

The conclusions set out core recommendations, which the note argues will also be relevant to other development funding agencies:

  • Credit policies need sanctions to be effective
  • Meaningful reporting of a few core performance indicators will probably improve average credit project performance markedly
  • Generalist core staff who are responsible for microfinance projects need some level of microfinance literacy to do effective work
  • Agencies need to improve mechanisms, incentives, and resources for bringing financial-services expertise to bear on project design and implementation
  • Community-managed revolving loan funds, where the lending is funded mainly by a development agency’s injection of capital and there is no professional management or oversight, should be abandoned as a delivery mechanism, because the odds of success are unacceptably low
  • Development agencies should usually avoid credit projects where a government agency is the retail provider of loans, or where the government is actively involved in designing or supervising the credit delivery system
  • Credit projects tend to perform poorly if their amount is too small to command suitable expertise and management attention. Microfinance components that are embedded in larger projects tend to perform less well, not only because they may attract insufficient expertise and management attention, but also because the project’s other objectives sometimes distort the financial services component

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