Can MicroStart Have a Significant Impact on Policy and the Environment for Microfinance?

MicroStart programs establish an action-oriented framework for bringing key players together to learn about microfinance development. These players include government policy makers, private sector actors (potential social entrepreneurs or financiers), MFIs, and other donors. By creating this interaction, MicroStart has the potential for significant influence on the thinking of policy makers and other leaders. This potential was clearly demonstrated in Morocco, and to some extent Ivory Coast. At times, the effort of bringing all the players together causes frustrations and delays. However, the effort is worthwhile because bringing all these pieces together is what makes MicroStart especially effective in influencing the environment for microfinance.

A. Advisory Boards and Government Policy Makers The evaluation showed that MicroStart has a significant impact in the two countries visited where microfinance is new. In Morocco and Ivory Coast the advisory boards include people who, by virtue of their positions in the government, the private sector and the donor community, are in a position to influence the evolution of the microfinance industry. The concentration of opinion leaders in one committee has allowed them to combine and concentrate efforts that have added up to more than each individual could have accomplished alone. MicroStart has also:

Enabled wide access to and efficient dissemination of accurate information on microfinance Organized discussions and debates in a forum that has a purpose and a decision-making role specific to microfinance Brought influential leaders together in one cohesive entity The advisory boards take their responsibilities towards MicroStart seriously. They consider carefully which MFIs are performing, which are not and what to do about it. They listen closely to and learn from the TSP’s knowledge and experience. The success of the advisory board relates directly to how it is constituted. It is crucial that the right people are on the board, particularly the key people charged with overseeing microfinance within government, some people with a strong business orientation, and some who are microfinance experts. The board training that SUM conducts at the launching of MicroStart in some countries appears to have a positive effect on the quality and performance of the advisory board.

In addition, the UNDP government-executing agency is involved in MicroStart. In Ivory Coast and Morocco, the combined involvement of the executing agency and the leaders on the advisory board has had significant impact on the legal framework regulating MFIs. In Morocco, the government had already begun the process of developing a law on microcredit when MicroStart began, and the basic elements of the law had been sketched out. But MicroStart has been a learning laboratory for the regulators of microfinance, a first chance to become involved deeply with the practical issues. Through MicroStart, key officials have had ample chance to see how organizations actually operate and debate best practice concepts such as interest rates and financial viability. The Ministry of Finance representative who sits on the advisory board is responsible for regulating specialized financial institutions. He and his office now understand the need for cost-recovery interest rates, and although it must bow to the Islamic disapproval of high rates, his office will leave the door open for organizations to charge additional fees.

In Ivory Coast, the government-executing agency chosen by UNDP for MicroStart, IMEC, is responsible for overseeing application of the PARMEC law which governs MFIs. The IMEC representative is a member of the advisory board and he has convinced the board that all MFIs participating in MicroStart must be either registered under PARMEC or in the process of doing so.

In Mongolia, the TSP and the newly-created MFI, XAC, have worked with the Central Bank to develop an appropriate institutional framework for a microfinance institution and regulations on the supervision of and accounting standards for non-bank financial institutions.

In the Philippines, on the other hand, MicroStart is one of many microfinance programs and its advisory board one of too many committees. In this setting, MicroStart is not likely to have much policy influence. this suggests that MicroStart will have more influence in countries where microfinance is still a fairly new phenomenon.

In fact, MicroStart has a unique role in countries new to microfinance, because of the way that it organizes the players around the introduction of best practices. In countries with established microfinance sectors, MicroStart should enter only when it can identify a specific value added from its presence, for example, as in Zimbabwe where it is bringing in new kinds of organizations.

B. MicroStart and Government Funding Apexes In the Philippines, Egypt and Zimbabwe, the government executing agency provides wholesale loans to MFIs to capitalize their lending operations. In essence, they are funding apexes. In such cases, loans—not grants— are given to MicroStart participants. In Zimbabwe and Egypt MicroStart is dealing with standard social funds developed to mitigate the effects of structural adjustment. Such funds typically have a large pool of resources, but they have a history of supporting microfinance as a charity or providing loans directly themselves, in classic bad-practice fashion. In Egypt, for example, loans are structured in a way that precludes the MFI from operating sustainably. MicroStart is helping these funds develop more appropriate ways of working with microfinance. In the Philippines, the apex already has a large portfolio of loans to MFIs which are based on reasonably sound selection criteria and policies. However, the procedures of the facility are very cumbersome, and they cause problems for the MFIs participating in MicroStart.

The practices followed by such government apexes leave much to be desired. Procedures are complicated and the process takes too long and is frustrating to the MFIs. MicroStart, however, puts UNDP and opinion leaders involved with microfinance in a position to influence government agencies to adopt better practices. MicroStart should not become a promoter of government apexes as a general strategy. However, in cases where such apexes exist, and where government has directed those apexes to take the lead in microfinance, it makes sense for MicroStart to work with apexes, in part to engage in dialogue about improving apex operations.

But what are those better practices? And who knows about them? In order to wield its potential influence effectively, UNDP—perhaps through its MicroStart advisory board—needs to develop expertise in the area of sound practices of a government-funding apex. Furthermore, a strategy is needed on how the expertise will be gained, and how to persuade governments to adopt better practices.

C. Influence on Donor Policy MicroStart's mechanism of talking through funding proposals with advisory boards is an improvement over the standard donor model of just funding a single organization -- because it means lessons from the experiences are learned widely. With a MicroStart program in place, it will be more difficult for a donor to fund bad-practice, because the funding process is somewhat more open. The one-on-one model, on the other hand, keeps the lessons inside. MicroStart should be an attractive mechanism for other donors to support for that reason. This goes for UNDP offices as well. MicroStart operates side by side in some countries with egregious examples of bad practice in UNDP portfolios, such as having UNVs make loans directly. SUM should consider whether it can use MicroStart to raise questions about such practices.

D. Recommendations MicroStart should continue the advisory committee process, particularly with the new training program. We have only a few recommendations to improve the policy impact of MicroStart:

Focus on countries new to microfinance. In other countries, search for value added Add best practices for government apex funders to SUM's learning agenda.

Strengthen efforts to influence UNDP policy (see below)

MicroStart: Finding and Feeding Breakthroughs Midterm Evaluation Prepared for UNCDF/SUM 10 December 1999 Elisabeth Rhyne and Jill Donahue To learn more about this author, visit United Nations Capital Development Fund's Website.

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