IFAD's Experience: Five "Best Practices"

Five essential elements for promoting rural financial servces have been identified ... these best practices summarise basic notions and building blocks for project development, to be complemented by thematic lessons learned and specific technical tools.

1. Assess Costs and Risks
Focussing on the costs and risks of existing as well as potential project-induced activities of a participating financial institution (PFI) is a simple starting point for projects to promote financial services. However evident the need for sound cost and risk management may be, cost and risk considerations often rank far behind targets for providing credit and overly ambitious projects without due regard for the capacity of the PFI to provide services.

2. Emphasize responsive service structures
Understanding, sharing and incorporating priorities of partner institutions and project participants is another important strategic element. The need for a respnsive project design arises at two levels: first, between the financial institution and project deisgn and implementation. An external development intervention that is sensitive to the priorities, constraints and potentials of a PFI should be based on understanding of local institutions by project designers. The second level of responsive service structures is concerned with the relationship between the PFI and project participants. Projects need to be characterized by a strong emphasis on client demand and beneficiary participation during project planning and implementation.The greater the respnsiveness of project-supported institutional services to beneficiary priorities, the greater the prospects for a durable project impact.

3. Protect clients' interests
Mobilising small-scale deposits is only part of a comprehensive savings service package. Petty savings from resource-poor households need operative protection against loss of deposits. Misappropriation in savings and credit groups as well as imprudent lending from internally generated deposits threaten the security of savings accounts. Borrowers under such a project umbrella require customer protection as well. They have to be shielded against the risks of project-induced investments.

4. Improve borrower screening and loan appraisal.
Assessing effective credit demand based on repayment potetial requires certain skills in an institution. While local expertise is a useful input for the intial vetting of loan applicants, financial appraisal before sanctioning a loan should be left to the staff of microfinance institutions. The success or failure of a loan depends to a large degree on an accurate appraisal of the customers' repayment capacity. Weakness at this early stage of credit management can make the difference between the failure of project-supported credit and achieving high rates of repayment, thus determining the overall viability of the intervention.

5. Build on intitutional potential.
Financial institutions with a track record of effectively providing services to resource-poor households are a safer bet than creating new institutions. Possible constraints in terms of training, office automation, accounting and loan supervision should be addressed through the project and assistance provided for fine-tuning planning, management and control techniques.

Hartmut Schneider, "Microfinance for the Poor?" Development Centre Seminars. Paris: OECD and IFAD, 1997.

Hari Srinivas - hsrinivas@gdrc.org
Return to the Inspiring Ideas Page
Return to the Virtual Library on Microcredit