Anatomy of a Microfinance Deal: The New Approach to Investing in Microfinance Institutions
This note reviews the traditional project-oriented approach of donors to support MFIs. It outlines features of a new institutional approach with examples from the CGAP Secretariat experience.
MFIs successful in attracting donor funding under the traditional project-oriented approach had to juggle the requirements and special interests of several donors. Availability of funding was not aligned with the needs of the MFI, the process for obtaining these funds was often slow and inflexible, and lacked transparency.
The new approach focuses on a business-like relationship based on mutual accountability, institutional performance, and shared risks. In the institutional approach, the donor sees itself as an investor. The process for launching a partnership under the new approach entails:
- Transparent application process and clear focal point for accessing funds;
- In-depth institutional appraisal;
- Development of MFI's medium-term business plan;
- Formalization of deal through a partnership agreement;
- Establishment of periodic monitoring of institutional targets.
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