Donor Brief: Credit Components

This paper explores the performance of credit components in microfinance. The paper informs that:

• Credit components range from large credit lines within integrated rural development projects to small revolving funds in empowerment projects;
• Credit is targeted at a particular group of people and used for the purpose of purchasing an input or changing behavior;
• Credit services are channeled through a financial institution or offered directly by the project;
• Since the mid-1970s, most credit components have been observed to perform poorly.

Further, the paper identifies few reasons for the poor performance of credit components:

• Conflicting objectives of supporting sustainable financial services and meeting specific objectives for a target group;
• Confusion between resource transfers and financial services;
• Assumption that credit is a binding constraint;
• Management by non-specialized entities with little or no specialized technical background in micro-lending or a commitment to long-term sustainability;
• Significant pressure to commit funds.

Finally, the paper suggests steps that donors can take to improve microfinance funding:

• Avoid credit components where possible;
• Verify that access to financial services is a true constraint for the target group;
• Include microfinance expertise in project design, implementation, and monitoring, regardless of the size of the credit component;
• Support the growth of institutions specialized in the delivery of financial services;
• Institute accountability for credit components;
• In the absence of existing financial services, support stand-alone microfinance projects.