The Global Development Research Center's
Microfinance Framework for
Policy and Practice

Hari Srinivas
Management Tools Series E-064. Updated April 2020.

Introduction


The field of Microfinance sector is both old and new - people have always been borrowing, lending and saving for as long as there has been money (and in kind before). They have done this within their own communities, using their own systems and methods, without any external 'assistance' or resources. The sector is new in that it has primarily developed as a response to the inability or apathy of commercial banks and the formal financial system to serve the needs of low-income households and microenterprises.

In order to develop an effective response to the myriad range of challenges facing the microfinance sector today, the Virtual Library on Microcredit (VLM) has developed a framework to tackle these and related issues in the formulation of policy and practice of microfinance. The framework has also largely guided the development of this website.

The basic aim of this framework is three-fold:

  • to develop awareness and educate on issues related to microfinance
  • to assist in policy and programme development
  • to facilitate research, monitoring and evaluation
The target audience of this framework is kept broad to increase its utility value - microfinance practitioners, government agencies, NGOs, donor agencies, community groups, etc. The key is to emphasize the need for a range of responsibilities to be taken up by a range of actors and the need for networking and sharing of experiences among these actors.

The framework is divided into four components - (a) an overarching macro policy environment, (b) long-term financial sustainability of MFIs, (c) increasing outreach by capacity building, and (d) broadbased research and analysis. Each component is presented with a statement and explanation, key actors, related issues and examples.


The Framework


1. Policy Environment

Statement

Intelligent regulation and an enabling policy and programme environment at various levels - from local to national and international.

Explanation

A better understanding of microfinance issues, based on both best practices and worst practices, has led to more efficient and sustainable microfinance programmes. But as the number of microfinance institutions (MFIs) and their clients and portfolios increase, it is clear that there is a need for an enabling policy environment to be put in place at the local and national levels. Such 'formal' policies need to be directed at the overall financial system as a whole and those for commercial banks, plus new ones for MFIs.

The objectives of these policies are, first of all, to recognise the beneficial role that MFIs play in serving the needs of low-income households and microenterprises. They also need to focus on support services, both financial and non-financial, that MFIs would require. Policies also need to take into account the 'social' face of MFIs - in terms of their role in poverty alleviation, and therefore use evaluation and monitoring criteria sensitive to this orientation. MFIs, to a large extent, have sprung up as a result of the failures of formal banking systems, and hence, unique systems of reporting and other requirements have to be created, that different from those for commercial banks.

The 3As outlined by the Virtual Library on Microcredit (VLM) point towards a deeper need - Awareness: creating opportunities to learn about values, principles, and practice of microfinance; Assessment: developing resources and tools for communities and microfinance organizations to monitor progress and track good practices in their region; and Action: promoting wider participation in making microfinance available to all low-income households and microenterprises.

Key Actors

  • National and state governments
  • Central/Federal/Reserve Banks
  • UN and International institutions
  • Virtual Library on Microcredit

Related Issues

  • Central Bank rules on supervision, reporting etc.
  • Rules and regulations on savings and deposit mobilization
  • Rules and regulations on loan disbursement and collection
  • Registration and incorporation systems for MFIs
  • Alternative performance standards

  • Gender dimensions of microfinance
  • Microfinance support for local environmental management

Examples

  • Bangladesh
  • Bolivia

Links in the Virtual Library

2. Financial Sustainability

Statement

Use of market incentives and directed initiatives aiming at MFIs' financial sustainability

Explanation

Long-term survival and sustainability is critical for an MFI in being able to reach its target clientele and cover administrative and other costs. While social goals of reaching the poorest, and poverty alleviation are valid, sustainability - standing on ones own feet - is as true for a low-income household receiving microfinance, as for the microfinance institution itself!

Sustainability of MFIs has internal and external implications - internal, in terms of deposit and savings mobilization, financial performance, staff motivation, loan and administrative costs, etc.; external, in terms of availability of funds for loan disbursement, grants for community organizing and training etc.

Besides being efficient and self-sufficient, sustainability goals for an MFI also have other benefits - attracting external financial investment, satisfying any central bank reporting requirements if any, building trust among its clients and supporting institutions (including donors), satisfying and attracting commercial bank partners.

Key Actors

  • Non-governmental organizations
  • Training and research institutions
  • Evaluators and rating agencies

Related Issues

  • Innovative mechanisms for delivering financial services to low-income households
  • Rating of MFIs and other performance standards
  • Funds availability and its cost implications
  • Grants for 'non-financial' activities and programme initiation
  • Checklists, guidelines, best practices for MFI organization and operation
  • Mechanisms for developing partnerships between MFIs and commercial banks

Examples

Several MFIs in Latin America and Asia have managed to achieve self-sufficiency and sustainability -

Links in the Virtual Library

3. Capacity Building

Statement

More and value-added information targeted and packaged, including education, training and on-the-job learning.

Explanation

Capacity building of MFIs refers to both financial and non-financial capacity. Financial capacity building is essential for an MFI to absorb and manage increased funds for loan disbursement, an increased number of loans, clientele base, and savings, etc. Non-financial capacity building primarily focuses on institutional and human resources of an MFI - in terms of networking and partnership for training, skill development, information management systems, etc.

In a very broad sense, capacity building also involves advocacy and networking, where the viability and suitability of microfinance for poverty alleviation is demonstrated, in order to gain better acceptance and involvement from the larger civil society.

Key Actors

  • Microfiannce Networks and Resource Centers
  • Research and Training Institutions
  • Universities
  • NGO and NGO Networks
  • Virtual Library on Microcredit

Related Issues

  • Training and education
  • Documentation of Best Practices and Ideas
  • Strategies, tools and ideas
  • Microfinance business support services

Examples

  • Training programmes and capacity building exercises by microfinance networks in Poland (for Eastern Europe); Manila (for Philippines) and other regions
  • Workshops and seminars organized by universities and other organizations
  • Training programmes of UN and other international organziations

Links in the Virtual Library

4. Research and Analysis

Statement

High quality comprehensive research, including monitoring and evaluation, best practices, lessons learnt, sharing and transfer of ideas,

Explanation

As mentioned in the introduction, the current interest in microfinance has lead to a number of MFIs being set up in most developing countries of Asia, Africa and Latin America, including their 'transfer' to 'developed' countries.

This has lead, in turn, to a need for comprehensive research and analysis of the activities, policies, programmes and projects of MFIs. Research foci can be on the MFI's organizational and operational structure (supply studies) and on its clients (demand studies).

The aim of such research and analysis is not only to make MFIs more efficient and self-sufficient (through guidelines, good practices, management systems etc.), but also to demonstrate the viability and practicality of microfinance in being able to serve the needs of low-income households.

Key Actors

  • Research and training institutions
  • Universities
  • UN and International Institutions
  • Non-governmental organizations
  • Virtual Library on Microcredit

Related Issues

  • Evaluation of MFIs
  • Documentation and analysis of 'best' and 'worst' practices in microfinance.

Examples

  • Research and publications done by UN and other international organizations

Links in the Virtual Library


Creative Commons License
This work by GDRC is licensed under a Creative Commons
Attribution-ShareAlike 4.0 International License
. You are free to share and adapt this piece of work for your own purposes, as long as it is appropriately cited.
More info: http://creativecommons.org/licenses/by-sa/4.0/


on

Hari Srinivas - hsrinivas@gdrc.org
Return to the Virtual Library on Microcredit