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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 1 / January - February 2004 |
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News | Laying the Foundation for Economic Growth in Post-Conflict Settings Recapitalizing Liberia: Principles for Providing Grants and Loans. *Please note: the following piece is a working draft, being discussed among practitioners and donors, for field testing in Liberia. This note has been developed by John Tucker, United Nations Capital Development Fund; Tim Nourse, American Refugee Committee; Rob Gailey and Dave Park, World Relief; and Stephan Bauman, World Hope International, have developed this note. In previous post-conflict contexts, donors and practitioners have successfully provided grants and loans to affected populations to spur economic growth and reconstruction, promote the sustainable return of refugees, and rehabilitate ex-combatants. However, recent experience also demonstrates that if the provision of grants and loans is not well-managed, well-intentioned donors and practitioners can undermine the development of a healthy credit culture, delay the transition from relief to development, and harm communities in the long-run. This note is offered as a practical tool for donors and practitioners working in post-conflict situations to maximize the positive impact from both grant and loan programs. These principles, based on emerging best practices from development and post-conflict environments, are designed to promote rapid reconstruction while laying the foundation for economic growth. The note has been developed by donors and practitioners for application in Liberia, a country that provides an interesting test case to see if cooperation among stakeholders will lead to the proper use of grant and credit interventions. What Are Appropriate Criteria for Grant or Credit Programs? In relief situations, both grant and credit programs can be appropriate tools to help economically active poor people begin or expand businesses. However, the two interventions are not interchangeable and should not be mixed 1. When deciding which type of intervention to fund/implement, donors and practitioners should consider the target population, institutional capacity of the implementing organization, and the program/funding horizon. Grant Programs are appropriate when: * The operating environment is unstable and the target population is extremely vulnerable, mobile, youth or ex-combatants; * The implementing partners have community and microenterprise development experience, but do not have the desire or capacity to conduct longer term, more sophisticated microfinance programs. * The program and funding horizon are short term (one year or less). Credit Programs are appropriate when: 2 * The operating environment is stable and the target population is stationary, operates businesses, and has the capacity to repay; * The implementing institution has moderate to strong capacity and a focus on financial services or microenterprise development programs; * The program and funding horizon are long term (minimum of 3 years). In the immediate post-conflict timeframe, grant programs may in many cases be more appropriate. However, as the situation stabilizes and the general economic status of the population improves, the emphasis should change from grants to loans. What Principles Should Be Followed for Implementing Grant Programs? 1. Use grants as one-offs to avoid dependency and encourage investment. A series of grants to target populations can often encourage dependency rather than self-reliance since beneficiaries will come to expect hand-outs rather than hand-ups. Similarly, a series of grants may serve as a disincentive for investment, since consuming, rather than investing, the grant will be rewarded with an additional grant. 2. Separate Grants from Loans to avoid confusion. An implementing institution should avoid providing both grants and loans, since clients are likely to be confused. If this is unavoidable, the two activities should be separated by using different staff, targeting different populations (or having a clear criteria for graduation) and using clearly defined messages to present the products as grants or loans. 3. Accompany grants with training and or/mentoring. To increase the chances of effective investment, grants should be accompanied with training and/or mentoring by knowledgeable staff from the implementing institution. 4. Require a cash or in-kind contribution. To ensure that the beneficiary is serious about the business, they should be required to contribute in cash or in-kind at least 10% of the value of the project. This contribution could occur at a later stage, where beneficiaries contribute a portion of their product or service to a community project or other vulnerable population. 5. Coordinate with credit programs to facilitate long-term financing for clients. Coordination with credit programs, either through a direct process of graduation or by recommending good grant clients to microfinance programs through information sharing or a certificate process, will help entrepreneurs to gain sustainable financing for their businesses. What Principles Should Be Followed for Implementing Credit Programs? Global microfinance best practice lessons apply and work in post-conflict situations with reasonable stability after the immediate post-conflict stage 3. Considering the difficulty and expertise required to implement effective and sustainable microfinance, the below guiding principles focus on the basic expectations that donors and practitioners should have, rather than the implementation principles themselves. The CGAP (www.cgap.org) website is a good resource for implementation principles. Any institution receiving support for credit/savings activities should be able to demonstrate competency in the following areas: 4 1. Institutional strength. Sound institutional culture with a mission and vision that is supportive of the expansion of microfinance services to low-income clients; management and information systems that provide accurate and transparent financial reports according to internationally recognized standards; and efficient operating systems; 2. Quality service and outreach. Focus on serving low-income clients and on expanding client reach and market penetration; financial services that meet the needs of the clients; 3. Sound financial performance. Interest rates on loans sufficient to cover the full costs of efficient lending on a sustainable basis, low portfolio in arrears and low default rates; a diversified funding base for microfinance operations to minimize dependency on donor subsidies. 4. Reporting. All recipient institutions must have a system for reporting regularly on the quality of its services, outreach, and financial performance, including annually audited financial statements. 1) Microcredit Menu, CGAP Focus Note "#20" 2) Doyle, Karen; Microfinance in the Wake of Conflict, The SEEP Network, 1998; Larson, Dave; MBP Microfinance following Conflict, Technical Briefs, DAI 2000. 3) ILO/UNHCR Technical Workshop: Microfinance in Post-Conflict Countries; Microfinance in Post-Conflict Situations: Towards Guiding Principles for Action, prepared by Geetha Nagarajan, 15-17 September 1999. 4) Small and Micro Enterprise Finance Guiding principles for Selecting and Supporting Intermediaries, Committee of Donor Agencies for Small Enterprise Development, and as adopted in the UNDP Programming Manual, Chapters 4.3.5 and 6.4.6, and the related annexes. |
