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Best Practices for Micro-finance

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									             Niamh Shortt and Heather Barry

          Irish League of Credit Unions
International Development Foundation
What is Microfinance?
 “The provision of thrift, credit and other financial services
  and products of very small amounts to the poor (mostly
  women) to enable them to raise their income and improve
  their living standards.” (Morduch, 1999)

 Grameen Bank success (1970s) sparks an international trend.

  Traditional banks – ‘break-even point’

  Microfinance (MF) can fill the financial services gap and be used as
  a development tool.
       Providers, and Role of MF in
 Different providers: Governments, private banks, NGOs,
  the Grameen Bank, Small Medium Enterprises, SHGs,
  credit unions, financial cooperatives

 Is MF an effective strategy to get people out of
  poverty/reach the Millennium Development Goals?

 MF is a tool, not a solution.
Problems stem from belief:
     ‘MF is a solution’
Case Study – Indonesia
 The Small Farmers Development Fund (SFDF)

 Provided microfinance services to women in agricultural families.

 Provided training programmes (business management, marketing,
  leadership skills).

Positive results:
 54% increased the quantity and variety of their products,
 34% reported an expansion into activities outside the group business,
 112% increase in income,
 90% of families lifted above poverty line,
 97% repayment rate,
 increased children’s education & improved nutrition.
 Facilitates savings and income generation.
 Facilitates new business opportunities.
 Positive externalities for household and community– health,
  education, empowerment, etc.

Common Problems Not Sufficiently Addressed
 Distorted repayment rate (evaluation)
 Market saturation (economic infra.)
 Long-term vs. short-term growth (evaluation)
 Diseconomies of scale, ‘crowd out’ industry (economic infra.)
 Lack of coordination (political)
 Social collateral (social)
 Globalisation and neoliberal agenda (social)
                          Credit Unions
 “A credit union is a group of people who save together and lend to each
  other at fair and reasonable rates of interest... Every credit union is
  owned by the members – the people who save and borrow with it.”

 As an external provider (i.e., not part of local government, nor part of local
  culture), credit unions prove to be one of the most effective MFOs.

 The foundation on which credit unions are built is trust, mutual
  ownership, and long-term commitment. This is what enables credit
  unions to be so successful in other communities.

 To avoid mistake of improper integration into local infrastructure, credit
  unions too must go through a planning process and use ‘best practices’.
Policy Recommendations
 Transparent decision making process

 Microfinance providers need to utilise Checklist and Best
  Practices – e.g. Credit Union

 Need to integrate MFOs into wider systems + strategies, and for
  MFOs to adjust to local community culture.

 Evaluation – long term & honest

 Education – all MF institutions must include education
  component to ensure program will self-sustain.

 Assess how MFI structures influence money use.
Best Practices
1.   Microfinance means building permanent local institutions that are self-

2.   Well researched and contexts specific plans to ensure long-term sustainability

3.   Type of collateral should reflect the local culture and the particular group
     you’re working with.

5.   Focus on women

6.   Flexible loan repayment

7.   Openness and accountability, trust in and close relationship with client

8.   The institution should have the provisions to increase loan amounts.

9.   Create incentives to reward those who pay on time; allow grace period where
     you are willing to reschedule payment dates, but issue penalties for payments
     after this period.
          Assessing the community:
Potential Donor
Area/Community/Group/Individual:          Microfinance provider

 Points to investigate and incorporate    What’s your area of expertise?
  to ensure a smooth and sustainable
                                           Is the service you’re offering what
- What’s the local hierarchy/people of      they need? (Plan X/Y – Z problem)
  power/legal structure

- How does the community operate?          Critically asses your time range
  (What is the local culture? Values,       commitment and level of resources.
  ways of communicating, business
  methods, barter)
                                           Are you going through proper
- What’s the scenario you’re moving         channels?
  into ? Crisis? Undernourishment?
 Microfinance is not a “magic bullet”

 More research and ground work needs to be done to
 successfully integrate MF into wider systems and

 Development practitioners must use a checklist to
 evaluate if conditions are right and implement best
 practices to ensure an effective programme.

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