Donors Back Index of Aid for Microfinance

December 05, 2006

Though you can't tell from the name, the Consultative Group to Assist the Poor is a World Bank-housed brain trust for 33 public and private donors that support microfinance. CGAP has just released the final, "endorsed" version of a Compact for Better Aid for Access to Finance. The two-pager comes out of a meeting of the donors that fund CGAP, which I attended in Paris in October as an observer. It "commits" donors to four broad steps to improve their support for projects that bring credit, savings, and other financial services to the poor.It seems that aid officials are constantly gathering in far-off capitals to issue nice declarations destined to fade from memory as new ones supersede. But I think this meeting, and this document, matter. Why? Because the donors have not just made promises but given an organization they fund a fairly free hand to evaluate and publicize how well they stick to their promises.Most official donors are involved in microfinance. But general concerns about how well aid is being delivered (for example, see Nancy Birdsall's Seven Deadly Sins) apply to aid for financial services. Are donors duplicating each others' efforts? Unnecessarily supplanting the private sector? Failing to listen to recipients? In response, in 2002, CGAP and 17 of its members started a peer review process. Teams of interviewers from CGAP and peer agencies descended on each of the 17 in turn and conducted intensive reviews of operations, much as strategic management consultants might. The teams found problems ranging from a "lack of clear vision within agencies on the role of the financial sector in development" to "little accountability for quality of microfinance portfolios." Commendably, all the aid agencies allowed CGAP to post their reports on its web site.In 2004, CGAP synthesized its analyses into a "star" of five themes, such as Strategic Clarity and Accountability for Results. In endorsing the new Compact, CGAP's members have given their blessing to the staff to build on the star with a "Quality of Aid Management for Microfinance Index," which will translate the assessments into numerical scores. Initial results should be out in the first half of 2007. (I advise this project.)Recent years have seen several efforts to grade donors on the quality of their aid, including ActionAid's Real Aid report, the aid component of CGD's Commitment to Development Index, and data collection under the Paris Declaration (from a different Paris meeting). These projects define good donorship by quantifying outputs--number of projects, amount of debt relief, etc. The purely quantitative approach has strengths: it garners attention and gets people thinking about important issues. But it is too coarse to offer much specific, practical advice. We can broadly agree that Mozambique is a better aid recipient than Russia, and that Tanzania has too many aid projects. But running an effective aid program can be no more formulaic than running an effective corporation.The CGAP work, in contrast, is based on a qualitative assessment of internal processes. It reminds us that good aid comes from organizations that work well--that combine clear vision with flexibility, that reward employees for a delicate balance of results and risk-taking rather than pushing money out the door, and so on. This is why I believe the CGAP index project has implications far beyond microfinance. CGAP is digging deep into what makes aid work. Aid agencies have bought into the effort and are watching. With the added punch of the new index, CGAP has an excellent chance at improving foreign aid.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.