Accessing Loans and Grants from Bilateral and Multilateral Agencies for Microfinance Institutions

This paper was commissioned by the Microcredit Summit Campaign in 2006.The paper examines the current status, the need and the scope of foreign investment in the microfinance sector. The paper makes the following points:

• Across the globe, microfinance institutions (MFIs) have accessed loans and grants from bilateral and multilateral agencies;
• Regulated MFIs are increasingly seeking domestic deposits to fund liabilities, leaving only a limited role for foreign debt investment;
• Non-government organizations (NGOs) are more likely to seek foreign debt;
• Bilateral and multilateral agencies can provide funds to MFIs in the form of equity, debt or guarantees;
• NGOs and other organizations, which could later evolve into MFIs, need help in the form of grants in their initial years;
• There are various ways in which bilateral and multilateral agencies can promote microfinance in low-income countries;
• Specialized apex MFIs play a vital role in the promotion and development of the microfinance industry of their respective countries such as:
  • Promotion and development of sustainable MFIs,
  • Innovations in microfinance products and systems,
  • Institutional capacity-building of MFIs, etc;
• Governments need to create a favorable legal and institutional environment for foreign agencies to extend their support to the sector;
• MFIs should use foreign funding only if local resources are not sufficient.

The paper concludes that national apex organizations form an effective bridge between donor agencies and local institutions, helping to develop microfinance and thereby reducing poverty.