Anatomy of a Microfinance Deal: The New Approach to Investing in Microfinance Institutions

August, 1997     Brigit S. Helms

What is the best way to support a microfinance institution (MFI) that has a track record of extending quality financial services to significant numbers of poor people on a progressively financially sustainable basis? The CGAP Secretariat has begun to examine this question through the application of a new model for cooperation between international donors and MFIs. The new approach focuses on a business-like relationship based on mutual accountability, institutional performance, and shared risks. This note critiques the more traditional “projectoriented” strategy and then outlines the basic elements of the new institutional approach with some examples from CGAP Secretariat experience.

Traditional Microfinance Projects
Traditionally, many donors have viewed microfinance NGOs or other institutions as channelers of their resources to particular target groups. Each donor typically specifies the target group as having particular characteristics related to gender, geographical location, poverty level, or economic activity. Each donor usually requires specific reporting and often separate audits related to its funding, as opposed to reporting that speaks to the overall institutional performance of the MFI, in terms of increased outreach to the poor and progression toward financial sustainability.

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