34241 DONOR BRIEF No. 21 December 2004 Helping to Improve Donor Effectiveness in Microfinance SUPPORTING MICROFINANCE IN CONFLICT-AFFECTED AREAS Supporting microfinance in devastated and fragile communities can be successful when donors work in concert, select qualified partners, are patient, are willing to take risks, and are prepared to pay higher costs. Effective microfinance can create the foundation for a fully integrated financial sector and fuel reconstruction. What are some characteristics of conflict-affected areas? Psycho-social à Loss of trust; death or geographic separation from families; difficulty in planning for the future; feelings of entitlement; fear of violence Economic à Loss of household and business assets; lack of trust in financial systems; distorted economy fed by aid money; small pool and high cost of skilled human resources Infrastructure and Damaged and neglected physical infrastructure and loss of access to basic services, such as services à schooling, sanitation, health care What are the essential conditions to start microfinance operations? External Environment · Minimum political stability. Microfinance is not a conflict resolution tool. Program areas must offer a reason- able degree of security and safety for clients and microfinance institutions (MFIs) to carry out their activities. In the Democratic Republic of Congo, USAID and CIDA focused microfinance efforts on pockets of stability while other areas of the country remained inaccessible. · Stable population. Maintaining timely loan recovery is difficult with mobile populations. Most programs focus on residents, internally displaced people, and returnees, rather than refugees--unless refugee communities are de facto semi-permanent. The American Refugee Committee (ARC) provided Sierra Leonean refugees quick access to Support credit upon their return home by certifying qualified entre- microfinance? preneurs in the quasi-permanent refugee camps in Guinea. · Sufficient economic activity and a cash economy. Micro- finance allows clients to take advantage of economic oppor- Sufficient external Provide other assistance? tunities--it does not create them. People need access to conditions? NO productive resources, be able to trade, and carry and use money for microfinance to work. YES NO Internal Donor Agency Capacity · Sufficient, qualified staff. Agencies should have a person in- Adequate Find a internal capable house, with experience in sustainable microfinance in conflict- capacity? NO partner? affected areas, to provide inputs in early program design, YES YES select good partners, and conduct performance-based Design monitoring. microfinance support project · Patient, long-term perspective. Donors may expect institutions to take longer to become sustainable relative to lower-cost, non-conflict settings. They should commit to three years or more. Donors constrained by short funding cycles should coordinate with others to ensure long-term access to funding. · Flexible, longer-term funding mechanisms. Whereas relief operations require large amounts of funding disbursed quickly, microfinance requires smaller amounts disbursed over time at higher administrative cost. Donors should offer grant funding without restrictive or rapid disbursement conditions--even in the face of political pressure. CGAP 1818 H Street, NW Washington, DC 20433 Tel: 202 473 9594 Fax: 202 522 3744 E-mail: cgap@worldbank.org Web: www.cgap.org CGAP European Office c/o The World Bank 66, avenue d'Iena 75116 Paris FRANCE What are the guiding principles for donors? Donors can play an instrumental role by following the principles below, and leaving operational decisions to strong financial service providers. Ø Applygoodpractices.Microfinancegoodpracticesdoapplytoconflict-affectedsituations.Coreprinci- ples, such as maintaining high portfolio quality, applying market interest rates, and planning for full cost- recovery, should not be compromised. Donors and their partners must understand client needs and their capacity to use financial services. Providing credit to someone who cannot repay only creates greater vul- nerability and insecurity. Other services, such as savings and transfers, may be more appropriate. Ø Ensureseparationbetweenreliefservicesandmicrofinance. Donorsworkingintheearlystagesofpost- conflict should agree with their implementing partners on when and where to offer grants for relief activi- ties to clients versus offering them financial services. This approach can help minimize damage to the credit culture. Areas completely dependent on relief operations are difficult for microfinance. Ø Selectexperiencedpartners.Donorsshouldpick implementation partners that have experienced staff Microfinance Is Not Always the Answer: A Range of Donor Interventions and a track record in microfinance in conflict- · Investments in infrastructure, e.g., market centers, affected areas. Preferred partners include local wells, and electrical or stand-alone generators financial institutions (commercial banks, credit · Employment services, including food for work unions, NGOs) and specialized international NGOs. projects and vocational and skills training Where none exist, donors can support organizations · Business development services with in-depth country knowledge to acquire micro- · Economic development grants finance expertise. In southern Sudan, USAID worked with Chemonics, a consulting firm with microfinance experience, to establish a local MFI which is managed by Sudanese and clearly distinguished from internationally-staffed relief organizations. Ø Avoidtargetedprograms. Forcingunsuitableclientsongoodpractitionerswillleadtopoorresults. Donors should not dictate that MFIs serve exact numbers or percentages of particular populations. High risk groups, such as youth or ex-combatants, might be better served by other non-credit services or grants. Ø Takemeasuredrisks.Incentivesandaccountabilitymechanismsshouldstrikeabalancebetweenpromot- ing risk taking and ensuring sound performance. Still, donors should be prepared for occasional failures and high costs for staff, security, and transport. Ø Collaboratewithstakeholders.Donorsshouldengagereliefagencies,localleaders,practitioners,and other donors to exchange information on programs, establish joint principles to support microfinance, and avoid undermining each other. CGAP and the World Bank designed the Microfinance Investment Support Facility in Afghanistan to combine diverse donor funding (DFID, CIDA, USAID) and goals into a single, flexible funding and institution-building support mechanism. Over US $20 million has been invested following good practice performance and transparency standards. Ø Beresponsivetothelocalcontext.Volatilesituationsrequiredonorstotreadlightlyandbesensitiveto political tensions that could have a serious impact on the success of a program. Donors may have to work in areas not controlled by traditional authorities. Author: Tillman Bruett (Alternative Credit Technologies), with input from Dave Larson (Hope International), Tim Nourse (American Refugee Committee), John Tucker (United Nations Capital Development Fund) and CGAP staff. Where to get more information: Tillman Bruett, "Conflict and Post-Conflict Environments: Ten Short Lessons to Make Microfinance Work," SEEP Progress Note No. 5 (Washington, DC: SEEP, September 2004), www.seepnetwork.org/content/library. Dave Larson et al, ed., Microfinance Following Conflicts Technical Briefs (Bethesda, Maryland: Development Alternatives, Inc./Microenterprise Best Practices, 2001), www.microlinks.org. John Tucker et al, "Recapitalizing Liberia: Principles for Providing Grants and Loans for Microenterprise Development," Forced Migration 20 (May 2004):13-15, www.fmreview.org. Geetha Nagarajan and Michael McNulty, "Microfinance Amid Conflict: Taking Stock of Available Literature," Accelerated Microenterprise Advancement Project (Washington, DC: USAID, August 2004), www.microlinks.org. Timothy Nourse, "Refuge to Return: Operational Lessons for Serving Mobile Populations in Conflict-Affected Environments," MicroPaper, no. 4, Accelerated Microenterprise Advancement Project (Washington, DC: USAID, May 2004), www.microlinks.org. International Labour Organisation, Introduction to Microfinance in Conflict-Affected Areas: Trainer's Handbook (Geneva: ILO, 2002). CGAP Contact: Alexia Latortue - alatortue@worldbank.org CGAP Donor Information Resource Centre (DIRECT) -- www.cgap.org/direct