Microfinance and Social Funds: Guidelines for Microfinance in Poverty-Focused, Multi-sectoral Projects

The paper presents a set of guidelines to help World Bank task team leaders and their client-country counterparts support effective microfinance within multi-sectoral projects, or social funds. These guidelines are drawn from case studies of social funds that have microfinance components and draw lessons from best practices.

The guidelines presented in this document are:

• Project design: Explore the full range of institutional options before including a microfinance project as part of a social fund;
• Focus on building sustainable institutions and delivery mechanisms;
• Evaluate existing financial institutions and check the contribution of social fund-microfinance program to the financial sector.
• Governments should build MFI capacity and encourage efficiency and innovation.
• Administrative autonomy:
• Maximize autonomy for the department managing the microfinance program;
• Separate grants from loans;
• Link salaries to portfolio performance and quality.
• Selection and monitoring of MFIs:
• Develop rigorous criteria for selecting partner MFIs and closely monitor performance;
• Selection and ongoing support should be transparent and competitive.
• Establish effective ways to monitor partner MFIs;
• Technical assistance:
• Microfinance experts should be included in the project design team;
• Include adequate resources for capacity building;
• Include training for both social fund staff and staff of MFIs;

Methodology and product design:

• Tailor methodology to local circumstances;
• Conduct market research to determine client demand.
• Legal and regulatory framework:
• Support broader financial sector reforms;
• Microfinance components should take a long-term perspective.