Critical Issues in Microbusiness Finance and the Role of Donors

This paper argues that, in the area of small and micro-business finance, donor institutions must be willing to operate in ways different from conventional ones if they really wish to support sustainable financial sector development.

The paper bases itself on a consensus that emerged during the early 1990s among leading experts in the field of small and micro-business finance, which focused on:

• Projects that would develop the entire financial sector of a country;
• A commercial approach that would keep costs as low as possible;
• Institution-building and the provision of financial services to target groups on a lasting basis.

The paper endorses the above principles but argues that putting these general principles into practice is more difficult than their proponents seem to believe, and also more difficult than most donors have been led to believe.

The paper discusses:

• The credit business of a target group-oriented financial institution, focusing on the need to adopt a special kind of credit technology that would keep costs low;
• The provision of deposit facilities to members of the target group, asking:
  • What role should the deposit business play in the process of building up a financial institution which is target group-oriented, cost-conscious and innovative?
• Institution building, including downscaling and upscaling strategies.

The paper concludes that institution-building projects are useful and can be successful, but tend to take up more time, effort and commitment on the part of the donors than they are willing to acknowledge.