33453 FocusNote NO. 23 DECEMBER 2001 A MULTILATERAL DONOR TRIUMPHS OVER DISBURSEMENT PRESSURE: THE STORY OF MICROFINANCE AT BANCO DO NORDESTE IN BRAZIL The CrediAmigo microfinance program mounted by Brazil's Banco do Nordeste (bn) shows how an international financial institution like the World Bank can be a useful cata- lyst in the development of microfinance retail capacity. The World Bank's patient, phased The Focus Note Series is support to bn as it designed, launched, and nurtured CrediAmigo goes against the com- CGAP's primary vehicle for mon perception that multilateral banks always focus on large near-term disbursements to dissemination to governments, donors, and private and financial the detriment of longer-term capacity building. Progress so far suggests some lessons for institutions on best practices in multilateral donors in microfinance: microfinance. Most importantly, outcomes may be better when large lending follows, rather than pre- Please contact FOCUS, CGAP with comments, cedes, the development of proven retail capacity. contributions, and to receive other notes in the series. Freedom from dogmatic presuppositions (for instance, "large state-owned banks can never do good microfinance") allows an opportunistic approach that is more likely to yield 1818 H Street, NW Washington DC 20433 results. Tel: 202.473.9594 After proper pilot work, a bank with a large pre-existing branch network can roll out mi- Fax: 202.522.3744 crofinance much more rapidly than a new microfinance-only institution. e-mail: Cgap@worldbank.org Generalist donor staff working on microfinance activities should get a basic grounding in the elements of sustainable microfinance, preferably through training or, at a minimum, www.cgap.org close work with specialists. Donors can be effective with a limited technical role--setting benchmarks consistent with international best practice, and putting the client institution in contact with top micro- finance practitioners. When missteps occur along the way but the client's institutional commitment to the program's objectives is strong, keeping the focus on the commitment can prevent over- reaction to the missteps. C G A P T H E C O N S U LTAT I V E G R O U P T O A S S I S T T H E P O O R E S T [ A M I C R O F I N A N C E P R O G R A M ] As of November 30, 2000, after only three years of op- While continued expansion will bring new prob- eration, CrediAmigo was already among the top micro- lems and challenges, CrediAmigo's performance so far finance institutions (mfis) in Latin America in terms has been impressive by any standard. This paper tells of geographical penetration, numbers of clients, and how it happened. depth of outreach. The program had over 55,000 ac- tive clients in 358 municipalities throughout the north- Background eastern region of Brazil. The average outstanding loan Brazil has long been considered one of the world's balance was r$541.47 (us$270), less than 6 percent of great untapped microfinance markets. Because of the Brazil's per capita gnp.1 country's large population, high poverty rates, and CrediAmigo's portfolio quality and staff produc- open economy, it has the largest concentration of mi- tivity are at international best practice levels. Only 2.5 croenterprises in Latin America--estimated at more percent of its loans are late, using a strict 30-day than 9 million, with at least 2 million in the Northeast portfolio at risk measure. Its annualized loan loss rate Region alone.3 Despite this large potential market and is also 2.5 percent, even after fully provisioning all scant outreach by the banking sector, in 1998 no Brazil- loans with any payment 90 days or more overdue. ian microfinance program had more than 5,000 clients. Loan officers with nine months or more of experience And only two programs, both nongovernmental orga- are each handling an average of 313 clients. nizations (ngos), could even be considered to be on a Profitability is developing well. About 85 percent path to full sustainability. A variety of reasons had been of CrediAmigo's 108 branches are operationally sus- suggested for the weak development of microfinance tainable, and the program as a whole reached full in Brazil, including the country's history of hyper- financial sustainability in mid-2001.2 Thus, Credi- inflation, the pervasive role of public banks, and the Amigo is demonstrating that a "down-market" focus small number of ngos. Yet other Latin American coun- can be consistent with sustainability in commercial tries with similar limitations had developed sustainable, banking in Brazil. high-outreach mfis more rapidly. Brazil's laggard sta- bn managers have repeatedly said that the example tus was particularly odd given that the first "modern" of CrediAmigo is having a catalytic effect on the rest microfinance program in Latin America, Projecto Uno, of the bank. bn is using the experience gained under was founded in Recife, Brazil, in 1971. CrediAmigo in areas such as the use of staff incentives In 1996 the World Bank decided to explore the de- and the development of a low-delinquency loan culture. velopment of microfinance as part of its poverty re- 1At the end of 2000, BancoSol in Bolivia had 61,000 loan clients, after 13 years of operation. Compartamos in Mexico had 64,000 clients, after about 10 years. The median outstanding loan balance for Latin American mfis was 45 percent of per capita gnp, according to the April 2001 MicroBanking Bulletin. In Bangladesh, Grameen Bank's average outstanding loan is us$140, or about 40 percent of per capita gdp. 2"Operational sustainability" is the ability to pay all operating costs except the cost of funds from interest income on loans. "Financial sustainability" is the ability to pay all costs, including financial costs, from interest income. 3For background on Brazil's microenterprises, financial sector, and microfinance industry, see Steven Schonberger, Microfinance Prospects in Brazil (World Bank, Latin America and the Caribbean Region and Economic and Socially Sustainable Development Unit, Washington, D.C. 2000). 2 Box 1: Reform sparks growth at Banco do Nordeste Dr. Costa de Queiroz was appointed president of BN in March 1995 following a very successful career as a private businessman in the state of Ceara. Dr. Queiroz immediately began a major reform of the bank, with the objective of making it more modern, efficient, and responsive to the development needs of the Northeast. Since then loan assets have grown from R$2.6 billion to more than R$6.0 billion; the number of loans has grown from 68,000 to more than 404,000. BN's market share increased from 35 percent of all loans granted in the Northeast Region to 78 percent. Administrative expenses as a percentage of assets are less than half their 1995 level (3.4 percent in 2000 vs. 7.9 percent in 1995). Staff were reduced from 5,468 to fewer than 4,000. Lag time between loan request and approval has been reduced from an average of 217 days to a mandated limit of 21 to 60 days depending on loan size. BN has reorganized its structure and processes to make the client its central focus and reduce barriers to staff interaction across functional areas. BN has invested heavily in staff training and information systems. duction efforts in Brazil's northeast region, the poor- terest and capacity. Private banks viewed microfinance est in the country. Since ngos were the only type of as charity work rather than as a commercial opportu- mfi operating in Brazil, the World Bank originally nity. Public banks were more interested, given their so- considered developing an apex (wholesale) institution cial mission, but seemed to provide a weak basis for a to provide funding and technical assistance. But the financially sustainable program. number and strength of the ngos were limited, and the Inter-American Development Bank was planning Banco do Nordeste expresses interest, agrees a us$150 million microfinance apex operation based in on basic principles Rio de Janeiro. The World Bank task team decided to In September 1996, bn's president Costa de Queiroz pursue a complementary approach focused on devel- told the World Bank he was interested in developing oping the commercial bank model, rather than a com- a world-class microfinance program. Emerging from a peting approach focused on ngos. major reform, bn had r$6 billion (us$3 billion) in The task team spoke with private and public banks assets and 176 branches throughout the Northeast Re- operating in the Northeast Region to gauge their in- gion (see box 1). To satisfy bn's regional development 3 mandate, Queiroz was looking for ways of reaching the seemed relatively free from external political interfer- poor that were more effective than the bank's directed ence. The bank was reorganizing to improve its effi- lines of credit had been. He was particularly interested ciency through better staff incentives, information sys- in the informal sector. tems, client focus, and flexibility--all key elements for In November, 1996 a World Bank team met with se- successful microfinance. The mission concluded that nior management at bn's headquarters in Fortaleza to these factors, along with the strong commitment of discuss microfinance experience and best practice. The bn senior management and bn's already significant two groups agreed on basic operating principles for de- outreach in the Northeast Region, outweighed the risk veloping a sustainable program, some of which would of political interference inherent in a public bank. involve significant departures from previous bn policy Based on the mission's assessment, the World Bank and practice: agreed to provide minor funding for a pilot micro- Above-market interest rates to clients, in order to finance program at bn through an existing loan for cover the relatively high cost of administering very technical assistance and training. The mission team small loans sustainably was convinced that consideration of a large World Compensation of microcredit staff based on the re- Bank loan was premature before mounting and as- sults they achieve (personal accountability) sessing the results of a small pilot operation. The leader of the World Bank team had the luxury of work- Management information systems that give micro- ing for a manager who was prepared to measure his credit staff immediate access to accurate transaction performance by something other than the amount of history and current repayment status for all clients funding he was able to commit each year. Decentralized credit decisions, backed up by ex-post quality controls The World Bank trains its staff Commitment to very high levels of loan recovery It is clear in retrospect that the effectiveness of the De-linking microcredit operations from bn's politi- World Bank's engagement with bn depended on the cally tied lending programs development of World Bank staff skills and the close Strong support from bn senior leadership, in the face involvement of successful microfinance practitioners. of the pressures that microcredit would place on bn's Once the Bank decided to support the CrediAmigo pi- operations. lot, both the task manager and his division chief at- At an early stage in the discussions, the World Bank tended the three-week Microfinance Training Program sought technical help from experts on the staff of in Boulder, Colorado. These officers say that the train- cgap. In February 1997, a joint World Bank-cgap ing helped them to focus the dialogue with bn on key mission visited bn to evaluate it as a potential micro- elements of success, and to bring to the table specific finance platform. The team was well aware that micro- technical advice from successful, experienced practi- credit programs in state banks seldom succeed. But tioners they contacted through the Boulder experience. they found that bn was not a typical state bank: its A number of these practitioners were later recruited by management was unusually business oriented and the World Bank task team or by bn. 4 World Bank technical involvement is limited for groups that consistently repaid on time. During the pilot stage World Bank and cgap assistance bn's cabinet chief was named general coordinator was limited to helping bn get high-quality interna- of the program, with freedom to recruit top staff from tional expertise and learning from similar experiences throughout the bank. In view of the high quality of in other countries. bn used World Bank funding for se- the program's management and design, the World nior manager study tours to successful mfis in Bolivia, Bank decided to arrange a us$900,000 Japanese grant Chile, Columbia, and Indonesia. Based on these visits, to support loan officer training, information system bn was able to consider technical approaches and de- development, and further technical assistance, all in velop a short list of consultants. bn chose accion preparation for a possible World Bank loan in support International, a group with strong experience in soli- of CrediAmigo's later expansion. darity group lending. bn leaned from their old unsuc- During the pilot phase the World Bank focused al- cessful, highly subsidized individual lending program most exclusively on the potential sustainability of Cre- aimed at the same clientele. diAmigo. Day-to-day management of CrediAmigo With accion's assistance, bn surveyed informal en- was left to bn. The World Bank distanced itself from terprises and developed pilot loan products. It also operational details and instead tried to help bn's man- prepared training materials and selection criteria for its agement keep its focus on the key elements needed for microfinance loan officers. The bank chose to out- sustainability. bn was clearly addressing pricing and source the microfinance loan officer function because administrative costs, but loan repayment did not get of the inflexible qualifications and salary levels of its sufficient attention. unionized workforce. Throughout this process the World Bank's role was limited to administrative assis- Overconfidence leads to disaster . . . tance in management of the funds. cgap's role was The pilot seemed to be going well for the first four limited to helping identify the requirements for pro- months. bn's management was excited by the pro- gram development, organizing study tours, and find- gram's potential and the positive response in high quar- ing potential technical assistance providers. ters of the government. In their enthusiasm, bn's se- In December 1997, bn initiated CrediAmigo in five nior managers decided to speed up implementation, of its branches. The pilot incorporated lessons from the expanding CrediAmigo from five branches to 50. They study tours, market study, and technical assistance. Test- announced publicly that CrediAmigo would have ing was restricted to a single loan product: 90-day loans 100,000 clients by the end of its first year of operation. to individual clients organized in "solidarity groups" of The World Bank, cgap, and the program's own ta ad- about five borrowers who cross-guaranteed each others' visors all warned that four months was far too short to loans. Payments fell due every 15 days. The interest rates test the repayment performance of the new loan prod- were considerably higher than bn's rates to its conven- uct, because defaults typically rose in later loan cycles. tional borrowers, but far below the rates of informal But bn management felt committed to the expansion. money-lenders. Prompt repayment was encouraged by The World Bank then indicated that further support, offering interest rebates and new loans within 24 hours including the Japanese grant, would be contingent on 5 maintaining good portfolio quality, with 30-day thought the relationship was worth continuing. But portfolio at risk no more than 5 percent.4 the task manager and key members of the team sensed As predicted, the expansion resulted in rapid dete- that bn management was still committed to making rioration of portfolio quality and heavy loan losses CrediAmigo sustainable, so they persevered with what (figure 1). Poorly selected and trained loan officers from the World Bank's perspective had become a far were given quantity-based performance targets, so riskier proposition. they rushed to lend without sufficient focus on repay- Indeed, it is not unusual for large banks to under- ment capacity and follow-up. The rapidly mounting estimate the complexity of consolidating a micro- loan losses took bn's managers by surprise.5 After two finance program. bn's experience shows that the re- months of expansion, the President of bn told all re- sulting problems don't have to be fatal, if the focus gional managers to slow or stop new lending and fo- returns to sustainability. The problems and costs of cus almost exclusively on loan recovery. accion their premature expansion convinced bn managers at worked with bn on loan recovery strategies, and on all levels that microfinance portfolio quality was chal- retraining loan officers and branch managers. Despite lenging and volatile, and that they needed to manage these efforts, the episode cost bn more than us$2 mil- it much more carefully. Since this initial misstep, Cre- lion in loan losses. It took another six months before diAmigo has focused consistently on growth with portfolio at risk fell back within the agreed limits. quality. This commitment has been evident in a vari- ety of ways: . . . but strong BN commitment gets Credi- Growth in the number of branches and loan officers Amigo back on track has been carefully controlled (figure 2).6 It would have been easy for the World Bank to walk away at this point--there were no deep or longstand- Though it's a state-owned bank, bn has maintained a ing commitments, and bn seemed to have shown its commitment to profitability in the design and manage- inability to resist political imperatives. It had done pre- ment of CrediAmigo. The program was initiated with cisely what naysayers had predicted at the outset of the a 5 percent flat monthly rate, translating to a 6.9 percent project. Few in the informed microfinance community effective monthly rate after adjusting for inflation.7 4"Portfolio at risk" is a measure that divides the remaining balance of loans that are late by the remaining balance of the whole loan portfolio. 5Because microcredit is unsecured, repayment discipline can collapse very rapidly. When a micro-borrower sees many of her peers defaulting on their loans, her motivation to repay plummets. The main reason she repays her loan is her expectation of future services; she knows that once people stop repaying, the service won't be available very long. She doesn't want to be the last one aboard the sinking ship. 6To increase its geographic outreach cost-effectively, CrediAmigo began establishing "individual branches" consisting of a single loan officer. These branches account for most of the growth in branch numbers since August 1999. 7In comparison with normal loans, microloans are tiny, yet staff intensive. Thus, administrative costs are high when measured as a percentage of the loan amounts. It takes a very high interest rate to recoup these costs, especially if management is committed to breaking even at an early stage. Expe- rience has shown that clients value the loans so highly that they are willing to pay elevated interest rates; in fact, many of them have been paying much higher rates to informal money-lenders. 8When bn transfers funds to a CrediAmigo branch, it charges an internal transfer price equal to the prevailing rate on Interbank Certificates of Deposit. 6 Fig. 1: CrediAmigo Client Growth and Loan Losses, Fig. 2: Growth in Loan Offices and Branches 1997­2000 300 250 60000 18 16 50000 TFOLIO 200 14 OF CLIENTS 40000 12 % POR 150 10 OF 30000 AS 8 100 20000 6 LOSS ANDING 4 10000 NUMBER 2 50 0 0 LOAN OUTST 0 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 Nov-97 Jan-98 Mar-98 Jul-98 May-98 Sep-98 Nov-98 Jan-99 Mar-99 Jul-99 May-99 Sep-99 Nov-99 Jan-00 Mar-00 Jul-00 May-00 Sep-00 Active clients Loan Losses Loan Officers Branches Fig. 3: CrediAmigo and Brazil Inter-Bank Fig. 4: CrediAmigo Employees by Source Loan Rates (Annual) 400 100 300 80 60 EMPLOYEES 200 OF 40 PERCENT 100 20 NUMBER 0 0 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 CrediAmigo Lending Rate BN Staff Contractors Inter-Bank Lending Rate Since then the interest rate has declined in proportion ated a "bank within a bank," first by outsourcing loan to the cost of funds in Brazil, but it has remained at officers, and then by replacing bn staff branch man- levels consistent with achieving early profitability agers with coordinators drawn from the loan officer (figure 3).8 pool (figure 4). Sustainability required a high-productivity model Branches were evaluated as individual profit centers. with low costs and an institutional culture that would But to maintain the benefits of scale in managing be difficult in a large public development bank. bn cre- information, innovation, and human resources, bn 7 strengthened CrediAmigo's Central Technical Units compensating for the generally mediocre performance and invested heavily in the management information by the rest. The consultants thought this was a result system to permit better central monitoring of loan of too much decentralization, but loan officers con- officer and branch performance. vinced CrediAmigo's Central Technical Unit that it was a result of market resistance to the solidarity loan bn's nontraditional management style has always in- product, with the result that the program began con- volved many top managers in decisions relating to the sidering a move to individual loans. program. While it takes a significant effort by Credi- Concerned with CrediAmigo's inability to achieve Amigo staff to keep a large number of very busy man- consistently sound performance program-wide, the agers educated about the special requirements of mi- World Bank again delayed loan preparation, and asked crofinance, it also wins a surprisingly high degree of cgap to provide direct technical assistance on key is- buy-in for CrediAmigo, considering that the program sues. The Bank's decision to proceed further with the barely affects the bottom line of such a large bank. loan would depend on bn's success in solving perfor- Support from the bn's president has never wavered, mance problems. nor has there ever been a question about whether the A cgap review in November 1998 recommended program should be run in a highly professional, non- that CrediAmigo management maintain the current political manner. The decision to expand prematurely loan product, simplify the incentive system, and in- was made for strategic rather than political reasons, and crease focus on several key variables related to loan was driven by overconfidence, rather than a lack of con- officer productivity, particularly new clients per loan cern for loan repayments. officer per month (figure 5). The World Bank and cgap returned to Brazil after five months and found Further challenges that CrediAmigo's management had made good faith As CrediAmigo's portfolio improved, bn was left with efforts to implement cgap's recommendations and the challenge of managing an expanding microfinance that portfolio quality and productivity were improv- business. With support from the Japanese funding, the ing. Based on these results, the World Bank agreed in CrediAmigo Central Technical Unit developed an in- May 1999 to proceed with the preparation of a loan to centive scheme for loan officers under which bonuses support the program's expansion. were tied heavily to repayment performance. The fund- ing was also used for extensive training modules and Finally, the World Bank makes the big loan for improvements in the portfolio information system. Because of the World Bank's historical knowledge of Following an identification mission for a proposed the CrediAmigo program, and the high quality of Cre- loan, the World Bank hired external consultants to as- diAmigo's information systems, the Bank needed only sess the CrediAmigo program. They found that al- a single preparation/appraisal mission to prepare a though overall program performance was improving, us$50 million loan to support the program's expansion the program continued to vary in performance among over the next five years.9 The mission agreed with bn branches and loan officers, with a few top performers management on performance targets that kept the loan 8 and its disbursement tied to portfolio quality, efficiency, Fig. 5: CrediAmigo Staff Productivity and sustainability. The World Bank's involvement with bn had looked very risky two years earlier; but by the 250 20 time the large loan was prepared, the risk had lessened 200 CLIENTS 15 dramatically, because bn now had a proven micro- CLIENTS AL 150 OTT 10 finance business and had demonstrated the manage- NEW OF 100 OF ment commitment needed to keep that business sound 5 50 as it expanded. NUMBER 0 0 NUMBER Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 The World Bank's Board of Directors approved the loan in May 2000. As was the case throughout the bn- New Clients per Loan Officer Total Clients per Loan Officer World Bank relationship, the loan agreement left bn with full control of, and responsibility for, the opera- tions by which the targets were to be achieved. An an- nual external review would be contracted, permitting the World Bank to limit its direct intervention to as- sistance with administration of its loan (procurement Fig. 6: Funding for Development of CrediAmigo (US$) and disbursement management) and assistance in de- veloping an impact evaluation program to be carried 150,000 300,000 out by a separate department of bn. As the World 900,000 Bank's role became more narrowly defined, cgap's role evolved from one of support for the World Bank in its relationship with bn to a more direct advisory role to bn focused on program strategy and capacity building. 5,000,000 Reflecting on the elements that led to success The activities most critical to CrediAmigo's develop- World Bank Budget/CGAP Japanese PHRD ment into a world-class microfinance program included Reprogrammed Loan Banco do Nordeste conceptualization, design, piloting, and initial consol- idation. The most notable aspect of these activities is that they required limited external funding and oc- curred before any disbursements from the World Bank loan. Though these processes required significant in- vestment from bn over almost three years, external as- 9In fact, bn could have funded the five-year expansion from its own re- sources. The World Bank loan was still attractive to the Brazilian Gov- ernment because it brought in needed foreign exchange. 9 sistance costs were relatively low. From 1996 to the donors or from consultants selected by donors. Rec- loan appraisal in 1999, the World Bank spent about ognizing this, the World Bank team limited its direct us$150,000 of its own budget, including the costs of role to providing focus rather than technical advice. participation in the initial seminar, short (usually two- Nevertheless it took the unusual step of investing in a day) observation missions, the Boulder training, one three-week training program for two of its key staff. identification mission and the project appraisal mission. In retrospect the team members felt that this training cgap provided about us$50,000 of technical support, was critical to the success of the engagement. Re- including its own staff time and external consulting. bn cruiting outside experts is important but cannot sub- received us$1.2 million in external financial assistance stitute for the role of a donor's staff as the authorita- (us$300,000 of reprogrammed funds from a prior tive interlocutors for their institution. Donor staff World Bank loan and us$900,000 from the Japanese). lacking some basic technical literacy in microfinance It spent about us$5 million of its own funds on the will not usually be able to identify good consultants or salaries of the bn personnel who designed the program, use them well, and may not have the credibility that is training costs, full financing of the loan portfolio, and essential for an effective dialogue with the imple- accumulated losses including the us$2 million write-off menting institution. of bad loans (figure 6).10 The most important contribution of World Bank The bn experience suggests that donors may need management was its patience in allowing development to be opportunistic rather than dogmatic in their ap- to proceed at its own pace. The process of developing, proach to microfinance. At first the World Bank was re- piloting, and consolidating the CrediAmigo program, luctant to support a large state-owned development particularly with the need to recover from the early bank, even one that had undertaken significant internal rapid expansion, took three years before a loan was reforms. But the demonstrated strength of bn senior appraised. This required exceptional patience from the management's commitment, along with a pressing World Bank's country management in Brazil, which need to develop substantial microfinance retail capac- was under pressure from various sources to move ity in the northeast region, and the Inter-American more quickly with the loan. Although there was some Development Bank's "preemption" of the ngo arena, consideration of moving more quickly with a smaller all combined to persuade the World Bank to take a risk and support CrediAmigo. Though the Bank was ad- 10One can argue that bn did not need to spend this amount of money, vised to withdraw its support, particularly after the ill- that it could have achieved the same results with a third of the up-front investment. But perhaps these types of "mistakes" are normal parts of advised expansion in 1998, the clear commitment of working through very large institutions. The alternative might have bn's senior managers to develop a world-class program been heavy-handed (and expensive) technical assistance, which the kept the World Bank engaged. Brazilians would not have accepted. There is evidence of banks that have spent far less, such as the Banco del Estado in Chile, which made vir- In comparison with other recipients of donor sup- tually no mistakes after spending a few years looking for the right port, managers of competent banks are particularly model, and banks that have spent far more, such as Bank Rakyat In- skeptical of, and resistant to, technical advice from donesia, which had to turn around the performance of 3,500 branches. 10 loan, management continued to support the task Pursue the best available opportunities in a country team's assessment of the program's readiness for a ma- rather than impose a universal model (all capacity- jor World Bank loan. building approaches involve substantial risks). As a result of this patient approach, a larger loan Allow programs to develop their capacity to manage was provided with less risk of undermining the pro- growth with portfolio quality before providing signi- gram's focus on sustainability. The initial development ficant funding for program expansion, even when this process allowed bn to develop its expertise and con- may delay lending targets (the biggest constraint to the fidence in managing a large microfinance program. spread of microfinance services is a shortage, not of Even the early missteps, based completely on bn de- funding, but rather of competent retail capacity). cisions with consequences financed by bn resources, Limit donors' technical role to setting benchmarks were an important element in establishing the pro- consistent with international best practice and putting gram's low arrears culture in a public bank environ- institutions in contact with top microfinance practi- ment. bn's success in resolving its early problems and tioners. developing a sense of how to manage the trade-off between growth and portfolio quality without the Ensure that donor staff working with MFIs have a pressure of disbursing a World Bank loan has brought grounding in the basic elements of sustainable mi- the program to a level where neither bn nor the World crofinance, preferably through training or at least close Bank see the us$50 million loan as an incentive to work with high-quality specialists. "supply-led growth." Maintain focus on program objectives rather than on The CrediAmigo experience suggests that the short-term performance issues and the missteps that are World Bank and other multilateral donors can play a inevitable during program development, especially in catalytic role in microfinance development if they: large organizations. 11 Focus Note No. 23 This Focus Note was written by Steven N. Schonberger and Robert Peck Christen. Mr. Schonberger is a Senior Operations Officer working in the World Bank's Cambodia Country Office. He previously worked on rural development and micro and rural finance issues as part of the Environ- mental and Socially Sustainable Development Department in the Latin America America and Car- ribean Region of the World Bank, based in Washington, D.C. Mr. Christen is a Senior Advisor at CGAP. The authors are grateful to Richard Rosenberg of CGAP for his considerable contributions. Comments welcome. Please con- tact Robert Christen at CGAP. Email: rchristen@worldbank.org Publication Manager: Tiphaine Crenn Production: Meadows Design Office Please feel free to share this Focus Note with your colleagues or request extra copies. All CGAP publications are available on the web www.cgap.org C G A P T H E C O N S U LTAT I V E G R O U P T O A S S I S T T H E P O O R E S T [ A M I C R O F I N A N C E P R O G R A M ]