How Donor Funds Could Better Reach and Support Grassroots Microcredit Programs Working Towards the Microcredit Summit’s Goal and Core Themes

In order to fulfill the Microcredit Summit’s goal of reaching 100 million of the world’s poorest families with microcredit by the year 2005, we must ensure not only that more resources are dedicated to promoting microcredit but also that resources are provided to the institutions in cost-effective ways. Donor agencies generally provide funds as grants or low-interest loans to microcredit programs, often with government involved as a guarantor. The administrative cost of providing these funds is often unacceptably high, and the amount that reaches the poor as loans is probably quite low. Donors should increase the percentage of funds used for microcredit that reaches the poorest to 70%. Several limitations exist in current methods of fund distribution by donor agencies. One significant limitation is an over-reliance on consultants, many of whom do not have the skills necessary to successfully advise and assist microcredit donors and practitioners. In order to strengthen their capacity to reach the poorest, donor agencies should declare what percentage of funds going to the microfinance sector will be committed to loans to the poorest and require each local office to produce annual reports on its contribution to achieving its country goal. A clear policy should be established to ensure that funds go to the poorest. This information should be circulated to CGAP members and to local microcredit/capital programs (MCPs), microcredit funds (MCFs) and NGOs. Moreover, agencies should create a country-level CGAP mechanism and hold at least one meeting each year to review progress and discuss upcoming plans. The Microcredit Summit estimated that US$11.6 billion would be needed as grants and soft loans to reach 100 million families. This additional US$11.6 billion could be mobilized by raising the percentage of ODA going to microcredit for the poorest from what is now up to 5%. Initiatives must be taken to build non-governmental, sustainable, wholesaler MCFs at the local level and channel donor funds to these institutions to initiate and support MCPs. Two examples of effective wholesaler MCFs are PKSF (Palli Karma-Sahayak Foundation), a national-level wholesaler of funds to MCPs in Bangladesh, and Grameen Trust, a funding and technical support provider to MCPs in Asia, Africa, Europe, and the Americas. PKSF and Grameen Trust demonstrate the capacity of in-country wholesaler MCFs to successfully and cost-effectively support microcredit programs. CGAP has a critical role to play as a catalyst in making the changes that I have outlined in this paper. With its stated commitment to reaching the poorest, and as an agency of which all leading donors are constituted, CGAP is uniquely positioned to assist in making these changes.

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