MISEREOR’s microfinance promotion

It is our conviction that financial services tailored to the needs of the poor are vital resources that are instrumental in enabling low-income groups to access and build up capital for microentrepreneurial and social investments. The broad scope of possible approaches to promotion in microfinance, ranging from "financial system development" to "learning how to handle money", in itself presents a special challenge to MISEREOR and its local partners. MISEREOR promotes various approaches, depending on the local conditions such as the financial landscape, target group and partner competences. It takes particular account of important criteria such as the concrete participation of the poor, pro-poor management (governance), local capital mobilisation and generation.

MISEREOR's promotion work has produced positive results in a number of areas:

1. Establishing new and strengthening existing self-help groups as informal / traditional savings and credit groups
2. Promoting linkages between savings and credit groups and banks
3. Setting up and promoting microfinance institutions
4. Developing financial systems
5. Supporting exchanges and networking among microfinance institutions and promoting service facilities.

Each of the above approaches makes a specific contribution to the development of microfinance. For instance, traditional savings and credit groups in India are receiving support designed to strengthen their structure and build their capacities, in short to make them "bankable" before they are brought together with formal banks. The promotion of an informal savings and credit organisation managed by street children in Delhi is a further example. MISEREOR also successfully assisted CERUDEB in Uganda and Purba Danarta in Indonesia during their start-up phases. Today, both have evolved into banks of considerable size and with sound foundations. In Cameroon, MISEREOR is working in cooperation with the commercial cooperative Afriland First Bank to support the creation of rural microbanks (see project example “From ice cream vendor to lab assistant”).

Other approaches include the development and promotion of national (e.g. in Indonesia and Laos) and supra-regional networks of microfinance institutions (ACCU in Asia and MAIN in Africa), which act as service providers for their member organisations. These networks offer their members valuable opportunities for upgrading (training in management and banking, product development, etc.). On occasion, they also undertake lobbying work in an effort to align national legal frameworks with the needs of microfinance institutions.

Promotion priorities
MISEREOR's current priority areas for promotion are:

• Establishment of new and strengthening of existing savings and credit groups among the poor with the aim of making them permanently "bankable"
• Linkage of these groups with formal (micro)finance institutions
• Development and introduction of new, innovative and needs-oriented financial services, such as in the fields of insurance and money transfer
• Financial and commercial training and advisory services for selected target groups, e.g. individuals operating microenterprises or starting up businesses, to enable them to access financial services and use them successfully
• Mobilisation of local financial resources (e.g. via banks) for microfinance programmes
• Cross-regional exchange of experience and networking of microfinance institutions, primarily among small-scale finance institutions
• Lobbying and advocacy work to improve the political and socioeconomic environment
• Provision of microcredit funds only under very specific conditions.

National and international organisations engaged in refinancing and equity participation are now increasingly on hand to capitalise microfinance institutions and programmes. Consequently, MISEREOR will in future devote less attention to promoting capitalisation (e.g. provision of credit funds), opting instead to focus on capacity building measures.  

When all is said and done, it is the qualifications and professionalism of its staff and management that can make or break a microfinance programme. MISEREOR sets great store on its partners possessing the appropriate core competences, and endeavours to enhance these if necessary.

It also pays special attention to supporting its partners in devising and implementing new promotion approaches and instruments.   All of these sector-specific considerations are guided by MISEREOR's overarching goal: the sustainable improvement of the prospects and living conditions of the poor. This is the yardstick for measuring the success of a microfinance project. A range of indicators at both the institutional and customer/target group levels help to verify the impacts achieved in the light of this goal. MISEREOR obliges the executing agencies to identify and record suitable and practically workable indicators before it starts providing assistance for a project.

Important conditions and lessons learned: credit is not the be-all and end-all MISEREOR has repeatedly reviewed its strategies and criteria for promotion in the microfinance sector and continued to develop them further. Today our policy in this field reflects the experience and fundamental concerns outlined below.   MISEREOR has supported microcredit programmes for many years, generally designed as self-supporting revolving funds. However, the experience made has induced it to discontinue promotion of isolated lending programmes. Over recent years, MISEREOR has become more and more aware of two crucial imperatives: the poor need long-term access to microfinance and a variety of financial services. On the whole, loan programmes have failed to meet these needs.   While the provision of credit is a fundamental financial service, it is by no means sufficient to underpin self-help and self-responsibility. Safe and convenient savings deposit services can sometimes be more important for the poor. There are even certain contexts in which encouraging savings can prove to be the only responsible promotion approach, as it shields poor households from the pitfalls of incurring debts.  

Loans do not have to be cheap. The poor greatly prefer flexible, unbureaucratic and immediate access and processing. Moreover, subsidising lending programmes to lower the costs distorts or undermines the development of a viable financial market for low-income groups. Therefore, it is essential to offer financial services on terms that are geared to the conditions of the local (including the informal) financial market. MISEREOR thus refrains from promoting any measures that would impede the emergence of needs-oriented private sector financial services for the poor.  

Also, one-off access to financial services is not the answer; sustainable, long-term access is required. Reliable, continual access, for instance to working capital loans, is what small entrepreneurs in particular need. Programmes and institutions must be or become financially viable if they are to offer permanent access to their services with a broad outreach. This is only possible if both business and regulatory criteria are observed.  

While credit remains a key service, it can expose the poorest of the poor to the risk of running into debt. For this reason, the creditworthiness of the target group is a major prerequisite. If this condition is not satisfied, then interventions should start by focusing on consolidating creditworthiness (in the sense of repayment capacity). In specific situations, for example in areas where subsistence economy is predominant, teaching the people how to save and handle money is initially the only justifiable approach.   All financial services must be aligned with those available on the local financial market. Priority must be accorded to promoting the internal and local capital mobilisation and generation of microfinance programmes as this reinforces self-help and self-responsibility, is an important growth factor, and fosters integration into the formal financial market.  

Subsidised lending is detrimental to the vital development of a viable microfinance sector as an integral component of the financial system. Although financial services themselves should not be subsidised, it is perfectly admissible to subsidise the building up of structures that can provide sustainable services in this field. In this regard, it is essential from the outset to agree on and then uphold a clear exit scenario.