Community-Managed Loan Funds: Which Ones Work?

This focus note explores the increasing reliance of microfinance projects on community-managed loan funds (CMLFs). The note:

• Presents conclusions from a performance review of CMLF projects supported by donors and international non government organizations (NGOs) over 15 years;
• Argues that success is strongly linked to:
  • The source of funding for the loan group members;
  • The quality of external support community groups receive.
• Describes the study methodology, including sources and criteria for evaluating CMLFs;
• Reviews the performance of three types of CMLFs, namely:
  • Donor-supported CMLFs;
  • Savings-based groups;
  • Self-help groups (SHGs).
• Discusses both the advantages and the drawbacks of CMLFs;
• Addresses CMLFs' need for long-term external support;
• Reviews the debate over the relative merits of community managed and professionally managed approaches.

The note concludes that:

• Externally funded CMLFs almost never work;
• Savings-based CMLFs, that use no external capital, perform surprisingly well;
• SHGs, most of which have bank linkages, have shown mixed performances;
• CMLF projects need to do a better job of reporting performance;
• Instead of injecting loan capital into CMLFs, funders should use their resources to provide support services for the groups.