CGAP: Helping to Build a Microfinance Industry
The Demand for Microfinance Services
What does it take to build an industry? This question has become the focal
point for CGAP, the Consultative Group to Assist the Poorest.
Microfinance practitioners estimate that over 500 million poor people world wide
demand financial services, but microfinance serves only a fraction ? about 16
million. The task of building a viable microfinance industry to meet this
massive demand poses an exciting yet daunting challenge.
The Story so Far
Early efforts to provide financial services to the poor tied those services to
specific economic activities. Between the 1950s and 1970s governments and
donors focused on providing subsidized agricultural credit to small and marginal
farmers, in hopes of raising productivity and incomes. During the 1980s
microenterprise credit concentrated on providing loans to poor women to invest
in tiny businesses, enabling them to generate and accumulate assets and raise
household income and welfare.
The success of some microenterprise credit programs led to bold experiments with
product designs, delivery methods, and institutional structures, performed
mainly by practitioners in developing countries. These experiments resulted in
the emergence of microfinance institutions (MFIs), specialized financial
institutions that serve the poor.
MFIs exist in various legal forms, including non-governmental organizations
(NGOs), credit unions, non-bank financial intermediaries and commercial banks.
Their success has shown that poor people are valuable clients of specially
designed financial services -?and that serving this niche can be financially
The New Challenges
However, among the 10,000 + MFIs around the world, very few are currently viable
? by some estimates only one percent. And many remain heavily donor-dependent.
To meet the enormous demand for services, MFIs can no longer rely solely on the
limited pool of donor funds. Instead they must become part of the financial
landscape, attracting funding from more abundant commercial sources.
In short, microfinance must complete the metamorphosis from mostly
donor-dependent collection of programs to a mature industry capable of growing
But what are the constraints to building a microfinance industry? First and
foremost, to carry the industry moniker the microfinance community must develop
and adhere to sound financial standards to gain credibility from commercial
Second, microfinance practitioners must offer a wider range of financial
services beyond microenterprise credit. MFIs have traditionally offered
relatively rigid loans to cover working capital requirements of
microenterprises, principally among market vendors. But many MFIs increasingly
recognize that the poor are not a homogeneous group and they demand varied loan
products, safe savings, insurance, and other financial products. Developing
client-responsive, flexible financial services for the poor is a top priority.
Third, the microfinance industry needs to answer some basic questions: Who are
microfinance clients? How poor are they? And how do they use financial
services? Answers to these questions will help ascertain how to reach poorer
clients than are currently being served and determine which flexible financial
products can fully meet the needs of the very poor.
In 1995 a group of donor agencies including the World Bank launched CGAP,
initially oriented primarily to improve the quality of microfinance programming.
During the early years, CGAP played a pivotal role in developing a common
language about microfinance, catalyzing the move toward best practice
performance standards, and building consensus among its many and varied
As CGAP's membership grew to the current 27 bilateral and multilateral donors,
and its small investment fund became more visible, many in the microfinance
community initially thought of CGAP as another donor in the fray.
As microfinance continues to transform into a cohesive industry, CGAP has
undergone a metamorphosis itself: from a donor-type organization to a service
center to the fledgling industry.
Principles to Live By
Recognizing the challenges facing the industry, CGAP has formulated a set of
guiding principles to focus on over the coming years:
- Build institutional capacity on the ground -- as long as demand far
outstrips supply, increasing the number of competent MFIs providing services at
the retail level remains the number one priority.
- Put clients at the center ? CGAP believes that listening to the poor is key
to knowing who they are and understanding their financial services needs and
- Move from microcredit to flexible, pro-poor financial services ? Not all
poor people want credit or can use it effectively. Voices from the field tell
us that the poor require financial services that allow them to address a range
of needs, from investment to death ceremonies to education and health expenses.
- Extend the poverty-sustainability frontier ? The twin pillars of reaching
the very poor and achieving financial sustainability may involve tradeoffs, but
both can be improved.
- Improve transparency ? Transparency promotes accountability and is a
powerful tool for improving the quality of MFIs and their services to clients.
Transparency should be promoted both on financial matters as well as the poverty
profile of clients.
- Appreciate the critical role still remaining for donors ? Donors will
continue to play an important role in the development of the microfinance
industry, particularly in supporting early-stage pioneering MFIs that show
commitment to sustainability and promise to reach significant numbers of very
CGAP as a Service Center for the Industry
If CGAP is a service center for the microfinance industry, to whom exactly does
it offer services? And what are these services anyway?
- CGAP has three sets of clients: MFIs, donors and the microfinance industry as a
whole. It offers technical assistance and strategic advice, the development and
dissemination of technical tools and services, the delivery of training, and
action research on innovations. CGAP also has a small grant facility that
provides funding for these activities and for strategic investments in MFIs.
- Microfinance Institutions. Despite the enormous success of a few celebrated
MFIs, most remain small and weak in terms of outreach and financial performance.
These institutions require exposure to best practices and greater technical
capacity and financial resources.
Technical advice and exchange: CGAP's strategic advice and technical
assistance includes in-depth appraisals of MFI performance, facilitation of
business planning and financial projections, and specialized advice on such
areas as setting interest rates, managing delinquency, implementing appropriate
staff incentives, introducing new products, and responding to external crises.
- Training and capacity-building: CGAP's global capacity-building initiative
aims to develop local markets for training and technical assistance that can
replace the current over-reliance on international expertise. CGAP firmly
believes that these support services are integral to any industry, including
microfinance. CGAP's six capacity-building hubs and partners worldwide serve
more than 40 countries in Africa, Asia, and Eastern Europe. These hubs have
trained more than 500 practitioners, and demand remains high.
- Tools: Based on expressed demand from the field, CGAP has produced several
tools for microfinance practitioners, including the Handbook for Management
Information Systems for Microfinance Institutions, Business Planning and
Financial Modeling for Microfinance Institutions: A Handbook, and a series of
Occasional Papers. CGAP and other partners use these very popular tools to
complement their technical assistance efforts.
- Funding: CGAP uses its small grant facility to support a small number of
promising MFIs directly or through networks. Since its inception, CGAP has
invested nearly $21 million in 35 MFIs of all kinds. As a group, these MFIs
serve about 2 million poor clients. Perhaps more important than the direct
reach of these investments, however, CGAP's investments demonstrated to donors
and others a new institutional approach to funding anchored on performance-based
contracts, mutual accountability, institutional performance, and shared risks.
- Member Donors. CGAP services to its member donors are designed to mitigate
factors that can undermine donor support for building a microfinance industry.
Examples include limited staff experience or bad donor practices propelled by
disbursement pressures that can impede development of sound local institutions.
- Technical advice and exchange: CGAP provides portfolio review and joint
due-diligence services to member donors, and responds continually to donor
requests for information on project reviews, funding ideas, and opportunities.
- Training and capacity building: Since their introduction, training courses
for donor staff have been CGAP's most sought-after service. CGAP currently
offers two courses, one on basic concepts of microfinance and one on the use of
CGAP's Appraisal Format.
- Tools: CGAP has created several tools for donors active in microfinance.
Examples include the Appraisal Format and spreadsheet that helps them to
evaluate an MFI's operations, a Poverty Assessment Tool that enables them to
assess the poverty level of microfinance clients, the Handbook on External
Audits of Microfinance Institutions that guides them in commissioning audits of
- Microfinance Industry. CGAP holds a distinct comparative advantage in
addressing issues that affect the entire industry, like regulation and
supervision. CGAP can lay the groundwork for building the industry by investing
in crucial financial infrastructure that promotes transparency and performance
standards and sends the correct policy messages. CGAP's activities focus
specifically in those cross-cutting areas that many of its member donors find
difficult to support.
- Technical advice and exchange: CGAP participates in and sometimes
organizes selected high-impact conferences and seminars to disseminate
information on best practices.
- Training, capacity building and tools: CGAP has invested in products that
increase transparency and accuracy of financial information ? key
building-blocks for any mature industry. These products include the
Microbanking Bulletin, an industry journal that provides benchmark financial
data on MFIs worldwide; and an External Audit Capacity-building program to
provide MFIs, donors, and bank supervisors with procedural guidance for
Other core industry services include the newly launched Microfinance
Gateway, a web-based bibliographic database of about 7,000 on-line
documents (www.microfinancegateway.org); an Information Systems Consumer
Reports Service, another on-line service that will compare financial
software for MFIs; and a short notes series published in English,
Spanish, and French.
The Way Forward
Microfinance holds the promise of developing into a thriving and powerful global
industry that provides relevant financial services to the poor on a sustainable
basis. As part of its efforts to help build this fledgling microfinance
industry, CGAP itself has transformed into a service center. CGAP offers tools,
training, and services to its many clients ? microfinance institutions, member
donors, practitioner networks, local service providers, government policy
makers, and others in the microfinance community ? and maintains a deep
commitment to ensuring that its services remain fresh and relevant for the
evolving and dynamic microfinance industry.
The World Bank
1818 H St. N.W. Room Q4-103
Washington, D.C. 20433
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