CONCORD – A COUNTER PROPOSAL ON

Eligibility and Assessment Criteria for development NGOs

on Microfinance European Commission funded Programmes

1/1/2006

0. Preliminary remarks

- The discussions on eligibility / selection criteria for NGOS on microfinance European

Commission funded programmes fall within the framework of the new financial
architecture after 2006 (so not linked to one specific budget line).
- This document represents the framework and criteria for NGOs that are active in the
field of microfinance as part of their own development co-operation policy following
internationally agreed best practices.
- The main aim of development NGOs’ involvement in microfinance is poverty
reduction through supporting sustainable financial services for the poor, focusing on
innovation and start-up activities.
- Development NGOs consider it important that actions will be based on an initiative of
local partners and should ensure their involvement in the implementation phase.

1. Framework for EC support to development NGOs in the field of microfinance

1.1 General

Microfinance is increasingly seen as an integral, and no longer marginal, part of the financial
system. It plays an important role in reducing risk and vulnerability, and increasing the ability
of individuals and households to access basic services like health and education, thus having
a more direct impact on poverty reduction. Indeed it is a crucial building block for private
sector development.

The acceptance of microfinance as a powerful poverty reduction tool has led to initiatives
such as the establishment of CGAP (Consultative Group to Assist the Poorest) in 1995, the
launch of the Microcredit Summit in 1997, and the United Nations Year of MicroCredit in
2005. Despite these achievements, however, the vast majority of poor and near-poor
households still do not have access to financial services other than from moneylenders or
other informal sources.

1
The CGAP Peer Review team recognised the importance of continued EC support for
microfinance initiatives, suggesting that it should develop specific calls for proposals for NGO
supported microfinance projects, where the guidelines and “do’s and don’ts” would be
attached (conclusions of the CGAP peer review of the EC, March 2003). CGAP and its 28
member donors have also defined a vision for the future of microfinance: a world in which
poor people everywhere enjoy permanent access to a wide range of financial services,
delivered by different types of institutions through a variety of convenient mechanisms.
To improve their financial lives, poor clients require responsive financial services beyond
micro-enterprise credit-services that encompass savings, transfers, payments, and
insurance.

Within this document the term MFI is to be seen larger than merely financial or micro-credit
institutions. It includes organisations such as banks, microfinance institutions, networks, co-
operatives, self-help groups and savings led models of microfinance, credit unions, micro-
insurance organizations, and others engaged in providing sustainable financial services for
the poor.

1.2 Development NGOs and microfinance, some common myths

Myth One: NGOs in the microfinance sector have poor quality loan portfolios due to
inadequate management and control.
Whilst this may be the case for a number of organisations, NGOs using best practice usually
outshine traditional banks (regularly achieving 95% plus repayment rates) and minimise this
risk through appropriate management and monitoring.

Myth Two: All NGOs involved in microfinance rely on donors for sustaining their operations.
Yet many well-managed NGO MFIs throughout the world provide financial services in a
sustainable way, free of donor support.

Myth Three: NGO’s are poor at innovating.

Whilst some NGOs may stumble in the tug-of-war between issues of sustainable
microfinance and working with the poorest, most of the innovation that has occurred in the
microfinance industry, such as the village banking model developed by Grameen, has been
led by NGOs. NGOs venture where others fear to tread, especially in female-based
programming. Using grant funding and support from government and donor agencies, NGOs
can take higher economic risks than commercial actors, and are hence in a good position to
promote innovations that can benefit the microfinance sector as a whole. Examples include
village banks, micro-leasing in Madagascar and Chili, micro-insurance in Bangladesh,
Cambodia, Mali, Philippines and Zambia, as well as smart cards and remittances and rural
finance in the Philippines, Ghana and Ethiopia. New examples emerging from Cambodia
demonstrate that emerging MFIs can expand both sustainability and outreach1.

Myth Four: NGOs generally cannot mobilise funds on a large scale or pool risks over very
large areas in the way that more traditional, formal financial institutions can. (Hivos
suggested to write as myth “The formal financial institutions, like commercial banks, are able
to step in now, therefore international development cooperation and MFIs are no longer
needed in the microfinance industry.” – they thought this sentence relates better to the rest of
the section of Myth Four)
As in the commercial banking sector, there exists a wide disparity between the majority of
MFIs operating at the local level, and the few actors that have national, and even regional or

1 See for example: www.amkcambodia.com

2
global, scope. It is also quite clear that banks and investment funds are not stepping into
microfinance massively, but rather quite selectively and cautiously and on a modest initial
scale. The full entry of commercial banks into the microfinance sector will be a long-term
process. At a symposium in The Hague on 10th March 2005, an international expert panel
agreed in their judgment that it would take 20-25 years for banks to become the dominant
players in microfinance. They also emphasized that there is much to be gained from
partnerships between NGOs and banks in this field.

Myth Five: NGOs cannot successfully transform into formal, financial institutions.
Yet many NGOs around the world have successfully transformed their microfinance
programmes into fully licensed MFIs and banks.2 Moreover, on becoming banks, or by
"graduating" their borrowers to MFIs or banks, these NGOs bring into the formal financial
sector an ethos - as well as a bottom line demonstration - that will help assure access by the
poor, especially women.

1.3 Important contributions of development NGOs to micro-finance

- It is important to note that there is an significant NGO involvement in the existing

institutional sector where, for example, out of all the MFIs listed with the MIX market
(more than 500 registered MFIs) around 48% are in fact NGOs. So, the NGO world,
predominantly southern NGO world is a huge player in the MF field.

- Development NGOs that work following internationally agreed best practice in

microfinance have demonstrated that sustainable and properly capitalised MFIs can
be created, demonstrating that properly capitalised MFIs can meet the risk-return
expectation of conventional risk capital. It is recognised that successful micro-
finance is a hybrid of development objectives (social objectives) and financial
objectives that require a ‘for-profit’ element. The for-profit element is used as a
development tool to reach social goals. Early subsidised seed capital, for example,
helped expand the sector from a handful of MFIs to many thousands of institutions
around the world – now consisting of both NGOs and other regulated institutions.

- Despite high risk and long-term investment, development NGOs traditionally

support start-up. Start-ups have difficulty in attracting private investment, due to
large operational deficits prior to institutional financial break even. Grant funding is
needed not only for initial seed capital (capital build-up), but also to cover the
heavy, up-front costs of training, installing systems and hardware, and establishing
branches. Using grant funding and support from government and donor agencies,
NGOs can take higher economic risks than commercial actors.

- Development NGOs are also at the forefront of support to innovative actions in the
field of microfinance. Past experience clearly shows that innovative institutions,
supported by development NGOs, generated new or improved institutional forms,
processes and products that were subsequently adopted by other institutions. The
CGAP Guidelines give good advice in the fields of microfinance that have been
2 There are many examples: KREP, OBM in Montenegro, Bank Purba Danarta in Indonesia,
CERUDEB in Uganda, CVECAs in West and Central Africa, Sinapi Aba Trust in Ghana, AMRET
(is AMRET a bank or a licensed MFI? (ACLEDA has become a Commercial Bank) in Cambodia,
CRG in Guinea... In addition we can cite those that were transformed into mutuals in relation to
the legal framework of their countries: ACEP and CMS in Senegal, or the CVECAs in West Africa
that are fully supervised by the Central bank under the legal framework of Banque Centrale des
Etats de l’Afrique de l’Ouest (BCEAO).

3
 thoroughly explored, but there are areas where innovations are still needed to
deepen and widen the outreach of MFIs, one can think of frontier issues like rural
finance, product development in micro-insurance and remittances, social
performance measurement (CGAP Guidelines page i). It is clear that development
NGOs, using grant funding, are in a good position to promote innovations that can
benefit the microfinance sector as a whole.

- Development NGOs’ approach of microfinance typically emphasises the

development of institutions and systems, rather than simply the implementation of
programs. This requires a long term commitment, which development NGOs have
always been willing to engage in. For development NGOs it is a given fact that
financial innovation takes time because its result is a function of confidence and
trust as well as of risk.

In conclusion: Development NGOs, with their comparative advantages, and FFIs both have a
vital and complementary role to play in building an inclusive financial sector that reaches the
poor. Concessional finance such as grants, soft loans, guarantees and equity instruments
are still needed at all levels of the industry – and especially for building institutional capacity
of service providers at local and international levels and underwriting the development of
experimental products and services.

As such, CONCORD believes that the EC’s key added value lies in supporting development
NGOs during the start-up phase of sustainable microfinance, promoting innovation, forging
linkages, promoting increased transparency and competition, capacity building, and in
facilitating funding of global or multi-country networks that span the different levels of the
financial system.

2. Eligibility criteria for EC support to development NGOs in the field of

microfinance

Considering the above framework, we will outline below criteria from the point of view of the
development NGO community, as a counter-proposal to the EC criteria.

2.1 Eligibility of the actor

In the case of microfinance initiatives development NGOs submitting proposals in support of

microfinance have to have a sufficient level of expertise and a good demonstrable track
record in the field of microfinance. They should meet the following criteria3:
 They must be constituted as autonomous, non-governmental organisations, in
accordance with the laws in force in that country, with a clear focus on social goals, on
development objectives and on reaching the poor.

3 In the case of consortia or networks, the lead organisation that is directly responsible for the
proposed microfinance action has to meet these criteria. Other consortium members do not
necessarily need to meet all those criteria, yet there has to be an added value for their participation.
These can be young highly-specialised organisations at the forefront of innovative approaches, less-
experienced organisations that learn through membership of the consortium (for example
organisations of new EU Member States that are interested in getting involved in microfinance)…

4
 They must demonstrate their commitment to supporting the microfinance hybrid4 through
dedicated management decisions and an existing micro-finance policy which takes
account of internationally agreed standards of good practice;
 A minimum of 3 years experience in providing professional services or working with local
partner institutions for the development of sustainable microfinance,
 Provide evidence of having been a key player (amongst others by ensuring technical
support) in at least two successful sustainable microfinance activities or microfinance
activities that are approaching sustainability for at least three years at the time the
application is made to the EC (it is important that these activities show a potential
contribution to the strengthening of the existing and/or emerging financial system in the
country;
 Have the capacity to mobilise, for sustainable microfinance actions, private financial
resources and possibly other support, within Europe and / or in the developing countries,
where appropriate;

In addition:
 The local partner will be an organisation with clear social goals translated into its
operations, committed to delivering sustainable microfinance activities through specific
policies and management decisions.

2.2 Eligibility of the type of action

They mainly concern:

• The funding of capital build-up (seed capital, equity participation, provision of credit
lines) for the start-up of microfinance institutions, including initiatives of an innovative
nature. An organisation to be supported in this case is considered start-up until it has
attained the possibility of accessing commercial loans and in any way not exceeding
7 years of existence. Organisations operating In disaster affected areas, ’frontier’
areas and areas in which there exists open conflict as well as in some remote rural
areas which lack financial facilities the maximum of 7 years may need to be
extended.
• The funding of capital build-up (seed capital etc.) for new microfinance services or
products in existing organisations. These can consist of existing and well known
services/products or of innovative approaches. It also includes the funding of
organizational innovation.
• The funding for capacity building of new management services, such as a Social
Performance Management System, new technologies, impact, networking, adapting
to government regulations, training…
• The funding of autonomous and clearly distinguishable microfinance initiatives,
preferably within a larger integrated development programme/context.

2.3 Application form

4 The combination of the for-profit imperative of sustainable microfinance combined with the social
objectives. The for-profit element should be seen as a development tool to reach social goals.

5
The application form will give emphasis to the following elements, relevant for the
assessment of microfinance operations:

1. Presence of an effective monitoring system involving the capacity within the partner
or implementing institution of reporting on key financial and social indicators,

2. Proof by the applicant and the partner that they operate according to agreed best
practices (ex: microfinance policy, interest rate policy, governance structure,
transparency, etc.),

And for actions involving the support to the start-up of a microfinance institution, by means of
the funding of equity participation, the provision of a credit line, or the setting up of a
guarantee fund:

3. Existence of a market data demonstrating the existence of a market failure justifying

the initiative

4. Appropriateness of the proposed exit strategy, but with the possibility for a “northern”
NGO to retain a long-term shareholder interest should they so wish.