Water, Water Everywhere, But Not a Drop to Drink

The main purpose of this paper is to discuss the ineffectiveness of the supply of funds to MFIs. On the one hand the overall supply of funds chasing strong MFIs exceeds their demand, on the other hand many promising MFIs do not receive enough funds to reach objectives such as sustainability and outreach.This paper identifies four principal reasons why donor funding is often ineffective including:

• Funds are allotted on basis of donor or government priorities, rather than MFI's needs;
• Large amounts of money languish unspent because of the conditionality, application and reporting requirements attached to the loans;
• Most funding is concentrated in a few countries and on a few strong and/or nearly sustainable MFIs;
• Donor countries encounter difficulties relating time, skills, and available information to identify less visible but promising MFIs.

The final section focuses on how donor funding can become more effective and what the role of donors relative to commercial investors should be. To sum up, the paper recommends that:

• Donors should invest more on promising but riskier MFIs;
• Additional resources should be spent on technical assistance;
• Donors should adjust their country-level programming approach to facilitate funding of global or multi-country MFI networks;
• Donors and investors have important and complementary roles, which vary depending on the development stage and institutional type of MFI.

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