Paper
Donor Brief: Credit Components
Analyzing the effectiveness of credit components in multi-sectoral projects
2 pages
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.
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