Microfinance Donor Projects: 12 Questions About Sound Practice

April, 2002     CGAP

“Microfinance” means financial services for the poor. Most donor support goes to lending (“microcredit”). However, services such as savings and insurance are also important to the poor. Their demand for financial services vastly exceeds the present supply.

Sustainability is a cornerstone of sound microfinance. This term refers to the ability of a microfinance institution (MFI) to cover all of its costs through interest and other income paid by clients. Financially sustainable MFIs can become a permanent part of the financial system: they can continue to operate even after grants or soft loans are no longer available. Donors have nowhere near enough funds to meet the global demand for microfinance. But when an MFI becomes sustainable, it is no longer limited to donor funding. It can draw on commercial funding sources to finance massive expansion of its outreach to poor people. Experience proves that microfinance can be done sustainably, even with very poor clients.