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Building Inclusive Financial Systems – Donor Guidelines on Good Practice in Microfinance

The authors state that these donor guidelines seek to raise donor staff awareness of good practice and improve the effectiveness of donor operations in microfinance. The lessons learned in the last 30 years of support to the sector are translated into practical operational guidance for donor staff.

This guideline argues that large-scale, sustainable microfinance can be achieved only if financial services for the poor are integrated into overall financial systems. The key to donor effectiveness is to complement, not replace, private capital and to accelerate innovative market solutions. It further notes that concessional finance has a role in building the institutional capacity of service providers and underwriting the development of experimental services (micro-level), supporting infrastructure such as ratings agencies, credit bureaus, and audit capacity (meso-level), and fostering an enabling policy environment (macro-level).

At the micro-level the guideline stresses that financial sustainability is essential to reach significant numbers of poor people and to realise long-term social returns. At the meso-level the emphasis on donor support should be to extend the meso-level services to microfinance – to include it in the mainstream rather than marginalise it. Finally, at the macro-level the guideline notes that a conducive, stable macroeconomic environment and policy environment is necessary to underpin a pro-poor financial system but donors should not support the direct provision of financial services by governments.

The guideline begins by setting out the 11 key principles that were developed and endorsed by CGAP and its 28 member donors and briefly discusses “understanding the needs of poor clients”. The bulk of the document then looks at “building inclusive financial systems”, describing lessons learned and offering operational guidelines for donor support at the three levels of the financial system described above (retail financial institutions, financial industry infrastructure and policy environment). The final section of the guideline concludes by considering how to ensure donor effectiveness – “elements of effectiveness”, “comparative advantage, harmonisation, and collaboration” and “frontier issues”.