Ways Donors Can Help the Evolution of Sustainable Microfinance Organizations

Publication Date: Aug 2000
Published by: Microfinance.com

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An exploration of the relationship between donors and sustainable microfinance

This paper suggests ways by which donors can help in the evolution of sustainable microfinance organizations. It argues that donors can:

• Give funds, measure progress, and spread good practice through technical assistance;
• Create an environment that rewards success and punishes failure;
• Lubricate entry and exit to encourage microfinance institutions (MFIs) to strike a healthy balance between sustainability and outreach.

The paper also points out that:

• Technical assistance is the best way to strengthen microfinance organizations.
• Sustainability is good because it helps microfinance organizations help more poor people than otherwise.
• Sustainability is hard because it requires balancing prices that the poor can afford with prices that are high enough to cover the costs of the MFI.

The paper:

• Defines sustainability and discusses the importance of profits;
• Discusses why the measurement of sustainability encourages sustainability;
• Examines how different forms of help from donors impinge on sustainability.

The paper concludes that:

• Donors must mimic market forces, ironing-out wrinkles and weeding-out experiments headed for a dead-end;
• Competition among donors:
  • Could improve competition among MFIs, and thus speed evolution,
  • Could wreck incentives for sustainability by weakening threats to cut assistance,
  • Makes donors unwilling to push fledgling MFIs that are nearing sustainability;
• MFIs that have credit are those likely to get more credit;
• Cutting a good MFI loose in the market takes discipline by the donors.