Use of Donor Funds in the Financing of MFIs

This paper addresses the changing role of donors in microfinance, particularly since the emergence of socially responsible and commercial investors. The paper argues that:

• The design of public policy should facilitate the entry of new private actors without abandoning the markets that could not work without some public support;
• Donors usually support microfinance institutions (MFIs) that are already sustainable;
• When they select an institution to implement their strategy, donors usually face a trade-off between increasing competition in the sector and the sustainability ratios of their portfolio.

The paper:

• Examines the consensus or lack of it, among different donor policies in microfinance;
• Differentiates socially-responsible investors from fully commercial ones;
• Arrives at an original classification of different funding sources, the actors and their potential market in the sector;

The paper concludes by proposing a new organization of financial instruments and segments of the microfinance market. It states that:

• If part of their mission could be fulfilled by other actors, donors could concentrate on segments of the market that are not likely to be addressed without their support;
• They could then select the best instrument for each segment;
• The microfinance sector must agree not to judge donors performance on the current sustainability ratios of MFIs that receive subsidies;
• Assessment of donors effectiveness must be done on the long-term data when the institutions will be less subsidized.