45100 FEIRB National Microfinance Strategies An increasing number of countries are developing national microfinance strategies, bringing the topic to the forefront of national development priorities. Over 30 countries, most in Africa, now have such strategies. This trend appears to be fueled by microfinance's heightened visibility and new development modalities that favor sector-wide approaches and policy work. After reviewing 29 national microfinance strategy/policy documents, CGAP identified common elements, early Countries with national microfinance benefits, and challenges.1 While the jury is still out on strategies/policies whether national microfinance strategies contribute to expanding poor people's access to finance, this Brief Africa Asia Benin Cambodia offers suggestions on how donors can avoid some Burkina Faso Indonesia pitfalls when developing these strategies. DRC Congo Lao PDR Congo Nepal WHAT ARE NATIONAL MICROFINANCE Brazzaville Pakistan Côte d'Ivoire Philippines STRATEGIES? WHO IS DRIVING THEM? Ethiopia Gambia Europe and Typically, national microfinance strategies are publicly Ghana Central Asia Liberia Kyrgyz Republic approved documents, developed through a Madagascar Russia consultative process, aimed at increasing poor Mali Uzbekistan people's access to finance. These strategy documents Malawi Mauritania MENA usually include an overview of microfinance, a vision Mozambique Egypt for the sector, strategic objectives, and an action plan Niger Jordan for implementation. Nigeria Yemen Rwanda Sierra Leone Developing a national microfinance strategy usually Senegal involves four stages: (i) conducting a diagnostic/gap Tanzania analysis of the microfinance sector; (ii) consulting with Togo Uganda stakeholders (more or less extensively); (iii) drafting a Liberia document, usually by a consultant in cooperation with Zimbabwe government; and (iv) adopting and implementing the strategy, including approval by a governmental body and, in some cases, defining action steps to put the National governments are mostly involved as co-pilots strategy into practice. and indeed are the official owners of these strategies. In some countries, such as Mali and Pakistan, national Donors almost always initiated this process through a microfinance associations played a significant role. national or regional project. UNCDF is the donor most often associated with national microfinance strategies, followed by the World Bank, AsDB, IFAD, KfW, GTZ, and USAID.2 In some cases, donors provided funding to help implementation. 1 This research also included consultations with more than 50 stakeholders and a funder roundtable in October 2007. 2 The range of donors and donor-funded organizations involved is much broader, including CGAP. June 2008 2 LESSONS LEARNED (such as commercial banks) or do not assess their performance. The diagnostics often neglect the Benefits financial infrastructure or the political economy altogether. As the foundation of a national Improved dialogue. The broad consultative process microfinance strategy, a flawed or shaky diagnostic that often accompanies the development of a national will have negative effects throughout all subsequent microfinance strategy has fostered improved stages. An incomplete picture of the sector may lead communication among practitioners, donors, and to plans that are not achievable. For example, shallow policy makers. In Egypt, for example, the process analysis of the regulatory framework may lead to lasted for 18 months and included over 300 inappropriate regulatory reforms. stakeholders. The consultative process helped rally the government and other stakeholders around common Isolation from broader financial sector. With their goals for the sector (e.g., encouraging commercial focus on microfinance, many strategies do not banks to be more involved and exploring opportunities properly take into account (or create links to) the to partner with the National Postal Authority). broader financial sector. This omission may create barriers to mainstreaming microfinance across diverse Increased knowledge of the sector. The diagnostic-- institutional types and may exclude important always the first stage of developing a national financial sector actors. As a result, opportunities to microfinance strategy--has sometimes led to a deeper have a broad array of actors that can offer diverse understanding of the opportunities and constraints for services (e.g., insurance companies, commercial increasing financial access. In Ethiopia, an in-depth banks) are missed. diagnostic revealed that the heretofore omitted Savings and Credit Cooperatives (SACCOs) held great Inadequate government leadership and capacity. potential for delivering financial services. Once their Many different government stakeholders need to be importance was revealed, SACCOs were invited to on board to implement a strategy. However, the play a more prominent role in the policy dialogue. responsibility for national microfinance strategies is often placed with a government body that lacks Commitment to good practices. In some cases, technical capacity and/or the political or legal power national microfinance strategies have gotten to successfully champion and implement the strategy. governments and other stakeholders on the record to As a result, some stakeholders may not "buy in" and adopt good practice principles and abandon unsound may continue with (bad) practices that are not in line policies. In essence, they can serve to establish the rules with the strategy. by which all actors must abide. For example, in the Philippines, practitioners and donors used the national Unrealistic and "template" action plans. About half microfinance strategy to lobby the government against of the national microfinance strategies include action its intention to deliver credit directly. plans for reform, many of which have unrealistic targets. Moreover, there have been instances where Challenges action plans developed for one country were simply reused with little adaptation to the local reality. Finally, Weak diagnostics. Diagnostics of the sector too action plans are often not fully funded. This can create often lack breadth and depth. They omit key actors disillusionment if expectations are not met. 3 RECOMMENDATIONS FOR DONORS strategy. Anchoring the strategy in a powerful and relevant entity (e.g., ministry of finance and/or central The following recommendations should be bank) may be a crucial element to its success. considered before (or while) developing a national microfinance strategy. Evaluate results. Donors should measure the performance and results of the national microfinance Invest in comprehensive sector diagnostics. A strategies they fund, including weighing the costs and thorough diagnostic is key to the success of a national benefits of taking this approach. microfinance strategy. Diagnostics should include the full breadth of the financial sector and a high-quality Be open to changing course. With the rapid analysis, with information on the financial health of emergence of new public and private actors in institutions. A diagnostic also should be forward microfinance, donors should introduce more flexibility looking. A range of experts with diverse technical in how national microfinance strategies are initiated, skills in financial systems development should be formulated, and managed. Even a well-designed engaged. It is unlikely that a single consultant can national microfinance strategy can quickly become conduct a sufficiently robust diagnostic, as is often the outdated and irrelevant. Donors should beware of case in practice. template approaches and overambitious action plans that are not backed with firm funding commitments. No Analyze the political climate. The political dimension assumptions should be made at any stage of the of national microfinance strategies cannot be process--even with regard to whether an action plan or ignored, especially with governments' growing even a national microfinance strategy is needed at all. interest in microfinance. Understanding and addressing the political undercurrents and context within which national microfinance strategies develop is important. Donors should have both the financial sector expertise and skills to communicate and negotiate complex processes. They should fully assess the capacity, interest, mandate, and power of all types of government actors to champion and implement the strategy (e.g., different ministries, federal vs. local authorities). Ensure local ownership. Donors should ensure that all the right actors, such as the private sector, all types of donors and investors, relevant government bodies, but also ministries that may have different perspectives and approaches to access to finance issues, are involved in the consultative process. Whenever required, donors also should help build the capacity of the local policy makers involved in developing, coordinating, and implementing the June 2008 All CGAP publications are available on the CGAP Web site at www.cgap.org. CGAP 1818 H Street, NW MSN P3-300 Washington, DC 20433 USA Tel: 202-473-9594 Fax: 202-522-3744 Email: cgap@worldbank.org © CGAP, 2008 AUTHORS Eric Duflos and Jasmina Glisovic-Mézières, with inputs from Alexia Latortue and Timothy Lyman