Inclusive Finance at UNCDF
What we do
The United Nations Capital Development Fund (UNCDF) offers a unique combination of investment capital, capacity building and technical advisory services to promote both microfinance and local development in Least Developed Countries (LDCs).
For more on UNCDF, click here.
Supporting microfinance: Building Inclusive Financial Sectors
UNCDF has identified microfinance as an effective means of contributing on a sustainable basis to poverty reduction and the achievement of the Commitments of the Brussels Programme of Action for the Least Developed Countries (LDCs), and the Millennium Development Goals.
For more on microfinance, please click here.
UNCDF's microfinance programmes aim to provide poor households and enterprises with enhanced access to a wide range of financial services by:
- promoting inclusive financial sectors and
- providing investment capital (loans, equity and grants) for emerging microfinance institutions and other financial service providers in LDCs.
In 2005, UNCDF strengthened its focus on building inclusive financial sectors as its main area of emphasis in the Inclusive Finance Practice Area.
UNCDF promotes inclusive financial sectors in LDCs using its unique Sector Development Approach.
For more on inclusive financial sectors, click here.
How does UNCDF's Sector Development Approach work?
UNCDF's Sector Development Approach builds the capacity of national policy makers to develop national strategies for inclusive financial sectors, based upon the premise that microfinance services will over time become an integrated part of the financial system.
This innovative technique is based on the recommendations of "The Blue Book" on Building Inclusive Financial Sectors for Development, in which microfinance is seen as an integral part of the broader financial sector.
The main features of the sector development approach are:
- Financial Sector Assessment
- Nationally owned vision, strategy and action plans for inclusive financial sectors.
- Investments.
For more on UNCDF's Sector Development Approach, click here.
Where has the Sector Development Approach been applied?
As a result of UNCDF's sector development programmes, national strategies and action plans for financial inclusion have been adopted and are being implemented by a number of LDCs, such as:
Burkina Faso
Central African Republic (CAR)
Guinea Bissau
Liberia
Madagascar
Mozambique
Nepal
PIC LDCs
Senegal
Somalia
Sierra Leone
Timor Leste
Togo
In 2006, other countries in both Africa and Asia have requested UNCDF assistance in building inclusive financial sectors.
Who's involved?
To develop the financial sector in a country, UNCDF gathers key stakeholders, including government (Prime Minister, Minister of Finance), parliament, financial service providers, the central bank, donors, and technical service providers, in a focused dialogue on financial sector constraints, challenges and opportunities and vision going forward.
The Results: Immediate improvement
Initial indications of the results of the sector development approach to financial inclusion are very encouraging. Most of the countries assisted have made some immediate improvements to their enabling environment, a result achieved through training and capacity building of regulatory and supervisory authorities. Over two-thirds have developed joint government and donor strategies. This percentage will increase as more countries complete their consultative process. In six countries the implementation of the action plans has commenced.
The case of Sierra Leone: Surpassing targets
The first country to start implementation of the sector development approach was Sierra Leone. In late 2004, together with KfW (Germany), Cordaid (Netherlands) and UNDP, UNCDF launched a US$10.3 million programme to build an inclusive financial sector in Sierra Leone. As part of this programme, investments were made in a variety of financial service providers. The institutions supported by the programme have already increased their number of active clients from 13,000 to 37,325. This surpasses the programme target of 20,000 for 2005 by 87%.
In terms of outreach, by the end of 2005, 438,272 people were receiving microfinance services from financial service providers, which include commercial banks, non-bank financial institutions, credit unions, microfinance institutions, community banks, and a variety of other financial services providers supported by UNCDF. This combined clientele of UNCDF-supported financial intermediaries included 199,352 female clients.
Overall, financial service providers in which UNCDF invested added 59,254 clients in 2005. Female clients comprised 45 per cent of these new customers. The overage loan size for these institutions was 55 per cent of GDP per capita in 2005. The first sector programme in Sierra Leone added 15,363 clients in its first year, 76 per cent of the total clients being female. The average loan size in Sierra Leone is 14 per cent of GDP per capita, reaching poorer people than the average among microfinance institutions around the world.
UNCDF and microfinance institutions
Supporting sustainable institutions
In terms of sustainability, more than 50% of the microfinance institutions UNCDF is supporting were meeting the international standard of strong portfolio quality (portfolio at risk at 30 days of less than 5%) in 2005. This level of performance is appropriate for institutions at this stage in their development cycle and is primarily due to (i) high standards set by UNCDF in its performance agreements and (ii) the challenge young financial service providers face in building systems to maintain portfolio quality as they grow rapidly.
Monitoring portfolio performance
UNCDF monitors portfolio performance closely and focuses significant capacity building around this issue. Of the institutions with which UNCDF is working, 16% have achieved profitability. These are older institutional investments in West Africa, confirming that UNCDF is taking risk and investing in younger, unproven institutions. The fact that 89% of the financial service providers in which UNCDF has invested demonstrates a positive trend toward sustainability is promising. This is a strong indication of the future sustainability of these institutions.
Fostering critical infrastructure investments
In 2005, a very high percentage of countries supported by UNCDF reported that they were also investing in financial services industry infrastructure, primarily financial service provider associations and networks. This reflects the recognition on the part of financial institutions of the importance of collaboration and investment in infrastructure to establish good practice in countries new to microfinance. The low percentage (63%) of providers with industry standard audits or ratings similarly reflects the niche where UNCDF is working.
UNCDF's investments in inclusive financial sectors consist exclusively of countries at the start-up or emerging phase of financial sector development, including post-conflict countries. For example, in Sierra Leone, the first audit of a financial service provider according to CGAP-recognized audit standards took place in 2005. This provided a learning experience both for the auditors and for financial service providers in Sierra Leone. Future audits for the whole sector will be based on this newly established standard.
Other UNCDF Initiatives
- Building Inclusive Financial Sectors for Development - "The Blue Book"
- UNCDF and UNDP - Partnerships in Inclusive Finance
- International Year of Microcredit 2005
- Microstart
- Microsave
