EU Microfinance Support Guideline 2008

Guidelines for EC Support to Microfinance

EuropeAid Co-operation Office, 2008

The EC supports the creation and development of local financial systems that reach out to include poor people and enable them to benefit from access to various financial services. Such financial services can be provided by banks and specialised retail institutions, but also by nongovernmental organizations active in developing countries (directly or through their local partners). Many microfinance institutions have a social orientation to reach the poor and have adopted the microfinance mechanism as appropriate for reducing poverty. The specific aim of a microfinance institution is to offer flexible financial instruments, not usually available from commercial banks, to greater numbers of the poor to meet local needs.

Outline: Financial services for productive, service or trading activities of the poor

Key definitions, policy focus (capacity building)

Examples of areas/levels of intervention 

Requirements for grant recipients (experience, expertise)

Performance indicators (explanation of financial, reference to social)

Criteria or onlending through specialised financial institutions and NGOs (special circumstances)

End-of-project strategies for revolving funds

Requirements for grant recipient

Measuring results oDefinition of performance baseline, targets and key indicators oStandard performance indicators should cover at least the five core areas: (1) breadth of outreach, (2) depth of outreach (3) portfolio quality, (4) efficiency, (5) sustainability 

Providing on-lending capital: Involving specialised financial institutions or, exceptionally, specialised NGOs (following a call for proposals). Limited to the following cases: there are no providers (remote areas, post-conflict) and the "start-up” MFI can fill the gap an existing MFI extends operations into rural areas. Funding must be complemented by capacity building. End-of-project (“exit”) strategy to ensure sustainable access to finance.

EC approach: Social and economic development, poor household and micro-enterprise strategies are often interlinked. Some types may help in ‘coping’ with poverty, others in ‘reducing’ income poverty or other forms of deprivation. Microfinance for enterprise development usually needs to be complemented by non-financial BDS. EC work in microfinance partly connects/overlaps with its action on broader ‘access to finance’ (for MSMEs). Sufficient rural outreach remains a challenge 

Linking microfinance to broader development objectives: Social development Financial inclusion of poor/low-income unbanked households  (e.g. access to savings, payment services, microinsurance, financial literacy, …) Economic development  Access to finance for micro/small-scale enterprises and smallholders (e.g. financial product development - appropriate loans, leases, etc. - based on enterprise/farm needs, cycles, seasonality…)

Funding of MFI capital needs only in exceptional cases, better left to specialised financial institutions, design appropriate specific « exit » strategy if credit is revolving. Focus on capacity building at different levels: Strengthen financial institutions (capacity building to diversify products, expand outreach, reach sustainability). Build strong support infrastructure for MFIs (training, information infrastructure, payments systems, advocacy). Promote a favourable legal and institutional environment for microfinance (balancing financial access, stability and client protection)