Building Inclusive Financial Sectors
The Sector Development Approach
Integrating microfinance into the formal financial system
Based on recent trends in microfinance, UNCDF made a strategic shift in December 2002 to concentrate its microfinance programmes on building inclusive financial sectors. This financial sector development approach is based upon the premise that microfinance services will, over time, become an integrated part of the financial system, and is founded on the recommendations of "The Blue Book" on Building Inclusive Financial Sectors for Development.
UNCDF's sector development programmes are designed to seize untapped opportunities, and to address the constraints that keep a financial sector exclusive. The central aim is to deepen the financial system in a given country to ensure sustainable access to financial services by poor and low-income people.
The main features of the sector development approach are:
- Financial Sector Assessment: Diagnosis of the financial sector with a view to identifying constraints and opportunities that need to be addressed to allow for the full participation of poor households and micro and small firms in the financial sector.
- Nationally owned vision, strategy and action plans for inclusive financial sectors: Based on multi-stakeholder consultations, a national strategy and action plan is adopted by the government outlining the main areas that need to be addressed to promote financial inclusion.
- Investments: Based on proposals received from MFIs, other financial service providers and stakeholders, grants and credits are made available through a multi-donor investment fund managed by an investment committee, for investments in capacity building, capitalization, financial infrastructure and improvement of the policy, legal and regulatory environment.
UNCDF's inclusive financial sector development approach ensures that
- investment requirements for increased financial inclusion are met in a structured and coherent way; and
- regulatory and policy constraints to financial inclusion are continuously registered and addressed by stakeholders, including ultimately national governments, thereby improving the enabling environment for financial sector development and financial inclusion.
Focus on Least Developed Countries
Given its mandate, UNCDF concentrates on building financial sectors in selected Least Developed Countries, mainly in Sub-Saharan Africa. UNCDF's expertise and purpose as a piloting organization is particularly suited for countries with a microfinance sector in the start-up or emerging phase.
The UNCDF advantage
UNCDF considers that it is well positioned to support the development of microfinance operations and microfinance sectors through its specialized team of microfinance experts both at the head office and in the field, through its close collaboration with UNDP Country Offices, through its ability to mobilize partnerships for joint efforts and through the flexibility and diversity of its products.
This competency of UNCDF was recognized during a Donor Peer Review of UNDP that was organized by CGAP in November 2002. The Microfinance Programme Impact Assessment 2003 concluded: "We believe that with a few key investments UNCDF is well placed to be a leading pioneer among the actors in the international financial architecture to meet the emerging challenge to make conventional financial systems more inclusive and thereby contribute increasingly to financial access to the poor".
Progress to date
Completed sector assessments
Since early 2003, sector assessments have been carried out in Burkina Faso, Central African Republic (CAR), Democratic Republic of Congo, Guinea Bissau, Liberia, Madagascar, Mozambique, Nepal, PIC LDCs, Senegal, Sierra Leone, Somalia, and Timor Leste. UNCDF is already in the process of facilitating the development of a national strategy and action plans in Madagascar, Senegal and Togo.
Sierra Leone: Programme underway
Together with KfW (US$3.8M), and UNDP (US$2.5M), UNCDF (US$3M) recently launched an initial US$9.3 million programme to build Sierra Leone's microfinance sector. Programme partners have agreed to streamline/harmonize their respective processes through a joint investment committee that will support the development of market leaders (NGO-MFIs, Non-Bank Financial Institutions (NBFIs), and Commercial Bank Units). Programme activities will also include training for key policy-makers, and capacity building of the Central Bank's microfinance unit to develop the supervisory and regulatory framework for the sector's integration into the financial sector. Interim activities (training of policy-makers; MFI training in business plan preparation) began within two months of the initial assessment, and formal project document approval came just six months after assessment.
Based on international competitive bidding, a Technical Service Provider, consisting of a consortium of Enterprising Solutions Global Consulting (ESGC, Canada/U.S.), and Micro Service Consult GMBH (MSC, Germany) is contracted and operational. The TSP has agreed to utilize the project's resources to leverage an additional US$12 million in resources, primarily from the private sector, with the indicative targets being: 1) Local Commercial Bank financing: US$2 million; 2) savings mobilization: US$3 million; 3) International MFI fund loan finance US$4 million; 4) equity: US$2 million; and 5) donor grants US$1 million.
Thus, of the total programme of US$21.3 million (US$9.3 million initial funding in addition US$12 million leveraged funding); UNCDF is providing US$3 million.
UNCDF Concept Paper on Microfinance Sector Development
For more detail, please download a copy of the UNCDF Concept Paper on the Microfinance Sector Development Approach [ pdf ].
To view individual UNCDF microfinance sector assessments, please see below.
Sector Assessments
- Burkina Faso [ pdf ]
- Central African Republic (CAR) [ pdf ]
- Democratic Republic of Congo (Executive Summary) [ pdf ]
- Democratic Republic of Congo [ pdf ]
- Guinea Bissau [ pdf ]
- Liberia [ pdf ]
- Madagascar [ pdf ]
- Mozambique [ pdf ]
- Nepal [ pdf ]
- PIC LDCs [ pdf ]
- Senegal [ pdf ]
- Sierra Leone [ pdf ]
- Somalia [ pdf ]
- Timor Leste [ pdf ]
- Togo [ pdf ]
National Strategies or Action Plans
- Togo [ pdf ]
Programme Documents
- LDC Fund to Develop Savings-led Market Leaders for Inclusive Finance (2008-2013) [ pdf ]
- Burkina Faso [ pdf
]
- Central African Republic (CAR) [ pdf
]
- Democratic Republic of the Congo [ pdf
]
- Guinea Bissau [ pdf
]
- Liberia [ pdf ]
- Madagascar [ pdf
]
- Malawi [ pdf ]
- Mozambique [ pdf ]
- Nepal [ pdf ]
- Pacific Island Countries [ pdf ]
- Senegal [ pdf
]
- Sierra Leone [ pdf ]
- Somalia [ pdf ]
- Timor Leste [ pdf ]
- Togo [ pdf
]
Generally, UNCDF carries out sector assessments as a first step in developing a programme. The following sector assessment was initiated by the association of local financial service providers in Timor Leste who received grant funding, and asked USAID and UNDP to partner to carry out the assessment. UNCDF reviewed the assessment, and found it to provide a solid basis for formulating a sector development programme. Rather than reinvent the wheel, UNCDF invited the consultant, Ms. Lene Hansen, who carried out the initial assessment to join the programme formulation team in December 2005. [ pdf ]
