Potential role of government and donor agencies for promoting social performance of MFIs?
Donor and government agencies are two important sectors which need to play vital role to promote access to finance and promoting social performance. They need to work hand-in-hand in order to achieve the effective social performance and complement each other. No parties alone can achieve the objectives.
Talking about government role, it can play three different roles:
As a protector, it can introduce legal policies and frameworks that safeguard the interest of micro-finance institutions development in the country alongside various other subsidies to them. It is the role of the government to create inductive environment for them and encourage more such institutions to enter the market and serve the people. As a provider, it can itself provide financial services or create infrastructure in the country for same. However, direct involvement in providing financial services is not recommended. The promotional role of the government can be both direct and indirect. The indirect promotion tools include policies and investments that benefit microfinance industry while not focusing exclusively on promoting fair competition, strengthening payment system, etc. Government also may promote microfinance sector more directly by developing a national microfinance strategy, establishing local wholesale facilities that provide MFIs with financial and technical assistance or by supporting so-called deprived sector lending in the selected un-served remote areas.
Again talking about government role in three different levels, it could be:
1. Macro Level
- Maintaining macroeconomic stability
- Building regulation/supervision system and capacity for controlling or monitoring Micro-finance institutions.
- Protecting citizen interests by protecting savings, controlling predative behavior, apply caps etc.
- Promoting equity in service provision or access
2. Meso Level
- Maintaining healthy financial system by circulating information to institutions, consumers and also by addressing failures if any.
- Facilitating access to capital
- Providing complementary social services
3. Micro Level
- Direct provisioning of credit
- Setting micro-level strategy
However, placing interest ceilings, directly and actively providing subsidies in loans and imposing political interference aren’t recommended for government.
Apart from government, donor agencies are going to play equally vital role in boosting social performance of MFIs. Some of the roles of donors could be:
- Donor agencies need to collaborate according to respective strengths. They should work on the policy level as per their level of experience and technical expertise. Also, they should collaborate with each other in order to compliment each other’s strength.
- They should provide technical inputs to poverty reduction strategy papers
- Also, they should use their national and international networks to foster and promote the MFIs while encouraging and empowering poor peoples.
- Donor agencies should be actively involved in teaching government the negative impact of ceilings on development and growth of MFIs in country and its social performance. Also, they can explain the rationale behind interest rates needing to cover the cost.
- They can provide technical support to the government to help formulate regulatory and supervisory framework.
- Besides, they can invest in public retail lenders and apex institutions in order to promote micro-finance services without impacting the sustainability of MFIs.