Apex Institutions in Microfinance: Occasional Paper

The paper reviews the experience of national microfinance apexes-wholesale mechanisms that channel funds, with or without supporting technical services, to retail microfinance institutions (MFIs) in a single country or integrated market. The question of the effectiveness of these apex mechanisms cannot be answered categorically, because evidence is limited, national contexts vary widely, and there are legitimate differences of view as to apexes' objectives. Some useful generalizations and lessons are be drawn:

• Apexes probably expand the supply of resources available for unlicensed microfinance institutions (MFIs), at least in the short term;
• Planning documents for apexes typically overestimate the number of retail MFIs that will be strong enough to channel the apex's funds effectively;
• Apexes for unlicensed microfinance institutions (such as NGOs) are most likely to be useful when they are created in response to the existence of a critical mass of competent retail MFIs, as was the case with PKSF in Bangladesh;
• Apexes that fund licensed institutions such as banks and finance companies have seldom been successful in encouraging these institutions to continue microlending when the apex money runs out;
• Apexes have not been successful in building bridges between MFIs and commercial funding sources Indeed, the incentive to seek commercial funds is weakened by the availability of easier funding from the apex;
• Management is key to an apex's effectiveness;
• The most important function of apex management is probably the selection of MFIs to be funded Focusing on institutional performance targets that are few in number, precisely defined, and seriously enforced is probably more effective than requiring massive reporting on detailed uses of funds;
• Political interference is a common problem in apexes, despite assurances to the contrary at the planning stage - the best protection will usually be to keep state participation in the governance of the apex to the minimum level possible;

The paper concludes that most of these lessons would also be relevant for guarantee facilities that support commercial bank lending to MFIs in a country, even though such facilities were not studied in the research leading to the report.

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