Microfinance

Microfinance is the provision of financial services, including savings, credit, insurance and payment services, to low-income people. Typically, low-income people, especially those living in rural areas, have been unable to obtain these services from the formal financial sector.

Microfinance: Guidelines and approaches
•	Guidelines for designing poverty-focused projects with microfinance components
•	Strategies for providing financial services to the poor
•	Typology of microfinance service providers
•	Guidelines for designing community manged revolving loan funds
•	Guidelines for designing microfinace credit lines

What key lessons have been learned about the financial needs of poor people?

Poor people, like everyone else, need permanent access to financial services. Therefore, the long-term sustainability of service providers is critical.
Access to micro-credit is not sufficient; the poor also need access to savings, insurance and payment services.
Most organizations need capacity building more than money for on-lending.
Technical assistance is often needed to develop appropriate products for the poor that can be delivered cost-effectively for the organization and conveniently for the clients.

Why include microfinance in Social Funds and CDD projects?

Microfinance is best supported through Financial Sector programs; however, in many countries/contexts where Social Funds (SF) and Community-Driven Development (CDD) projects operate, there aren’t Financial Sector programs with a strong emphasis on Access to Finance issues, nor are there many viable institutions serving a low-income clientele.
Even in countries with a strong microfinance industry, most low-income families, especially those in the rural areas, do not have access to financial services that enable them to build their businesses and meet other needs such as health care and education.
Communities supported by SF and CDD projects cite “income generation” as a critical need. However, investments in public goods such as community infrastructure do not directly help community members to increase their income. Income generation requires investment in private goods as well as training and technical assistance. Because low-income people rarely have access to financial services that are appropriate for the development of small economic activities, such investment is difficult without a microfinance intervention.
Grants for individual/family income generating activities may be appropriate in emergency or post-conflict situations to help families rebuild their asset base, or to provide a safety net to the destitute, but they are not a sustainable mechanism for financing small privately-owned economic activities.

Also see presentation on Microfinance in CDD and Social Funds Programs